When an insurer contemplates settling to its policy limits in an auto case, it must take steps to ensure that all potential claims have been accounted for.  Where an insurer, knowing of another claim for the same accident, paid its limits in three actions, it was held liable to pay the other claim in addition to what it had already paid up to the policy limits.

Scale Estate v The Cooperators General Insurance Company, 2018 ONSC 363 per Nightingale, J. [4284]

FACTS AND ISSUES:

On June 25, 2006, Mitchell Emms (“Emms”) was the driver of a motor vehicle (the “Emms Vehicle”) when he lost control of it and collided with three other vehicles (the “Accident”). Two passengers in the Emms vehicle, Amanda Scale and Chantelle Gail died as a result. Three other passengers in the Emms Vehicle and two occupants of the other vehicles were injured as well. The Estate of Amanda Scale and her relatives sued.  

The Emms Vehicle was insured with Cooperators under a standard automobile policy with $1 million in third party liability insurance limits. Three actions were brought, none by the Plaintiffs (“Estate of Scale”) with notice against Emms’ estate as a result of the Accident.  

Cooperators reached out to the Estate of Scale but did not hear back about whether or not they would be bringing an action. It realized that if the other three actions went to judgment, the total would surpass the $1 million policy limits. Cooperators negotiated with the plaintiffs in those three actions and reached a settlement for the policy limits (the “Settlement”). During this time, Cooperators did not conduct a court search to see if any other actions had been started. The Estate of Scale had in fact filed a Statement of Claim and had obtained an Order extending the time for service, but had not yet served it as at the time of the Settlement.  

Cooperators attempted to have the order extending service of the Estate of Scale’s Statement of Claim set aside, but were unsuccessful. The Estate of Scale eventually obtained a judgment against the Estate of Emms, and the Plaintiffs then brought an action against the insurer pursuant to section 258(1) of the Insurance Act, R.S.O. 1990, c. I.8 [analogous to s. 579(1) of the Alberta Insurance Act, R.S.A. 2000, c. I-3.] claiming entitlement to have their damages paid under the policy or as a share of the Settlement. Ontario’s s. 258(4) [like Alberta’s s. 579(4)] provides as follows:  

(4) The right of a person who is entitled under subsection (1) to have insurance money applied in or toward the person’s judgment or claim is not prejudiced by

  1. an assignment, waiver, surrender, cancellation or discharge of the contract, or of any interest in or of the proceeds of the contract, made by the insured after the event giving rise to the person’s claim under the contract,  
  2. any act or default of the insured before or after that event in contravention of this Subpart or of the terms of the contract, or  
  3. any contravention of the Criminal Code (Canada) or a statute of any province or territory or of any state or the District of Columbia of the United States of America by the owner or driver of the automobile,

and nothing mentioned in clause (a), (b) or (c) is available to the insurer as a defence in an action brought under subsection (1).

  Ontario’s s. 258(7) – (8) [like Alberta’s ss. 579(7) – (8) provides:  

(7) When a person has recovered a judgment against the insured and is entitled to maintain an action under subsection (1) and the insurer admits liability to pay the insurance money under the contract, and the insurer considers that

  1. there are or may be other claimants, or  
  2. there is no person capable of giving and authorized to give a valid discharge for payment who is willing to do so,

the insurer may apply to the Court ex parte for an order for payment of the money into Court, and the Court may make an order accordingly on any notice it thinks necessary.

  (8) The receipt of the proper officer of the Court is a sufficient discharge to the insurer for the insurance money paid into Court under subsection (7), and the insurance money must be dealt with as the Court orders on application of any interested person.

  Issue: Did Cooperators have a responsibility to respond to the claims of the Estate of Scale up to the $1 million policy limits, notwithstanding the previous Settlement with the other parties had resulted in a payout to the limits.

HELD: HELD:  For the Estate of Scale; The Estate of Scale held entitled to payment up to the policy’s limits. The Court found in favour of the Estate of Scale, noting that the Estate of Scale was entitled to an order requiring that the money payable under the defendant’s automobile insurance policy is liable to respond to the judgment by the Estate of Scale against the Estate of Emms up to the $1 million limits of the policy plus costs. The Court held that the right of the plaintiff to sue a defendant’s insurer for payment under the defendant’s policy was held to be “a right against the contractual liability as an asset available in effect for execution purposes” and thus “is a charge upon the insurance money” and that distribution of the defendant’s policy limits cannot be ascertained until all the eligible claims have been determined: Northern Assurance v. Brown [1956] SCR 658.

  • Furthermore, it was held that “the total claims for different injured parties involved in one accident can sometimes easily exceed the total amount of the defendant’s insurance policy limits available” in which case if the insurer settles with some of the claimants, it may be liable because of this section to the other claimants for the amounts of their claims in excess of its policy limits”: Brown and Donnelly, Insurance Law in Canada, updated October 2017; Billingsley, General Principles of Canadian Insurance Law, 2d ed., 2014, at page 317.  
  • The Court rejected Cooperators’ argument that it was entitled to pay out its limits in the other three actions pro rata on the basis that it was not aware of the Estate of Scale’s claim in this action:

[42]      The defendant’s position in this action is that it was entitled to negotiate a settlement of the three actions for those other deceased and injured parties and pay out the total amount of its policy limits of $1 million to them on a pro rata basis plus costs. It states that as no formal claim had been made by the Scale family members for their damages and it was not aware of any action having been commenced by them, it was entitled to settle the other claims on the “first come, first served” basis until the policy limits were paid out without any risk to it of the Scale family members claims also having to be paid against those limits of the policy.   [43]      The evidence establishes, as indicated above, that Cooperators knew of the death of the passenger Amanda Scale in the accident from the outset and knew that she had surviving family members who had made a claim for statutory accident benefits. It made no attempt to investigate the matter further and there is no evidence that the settlement of the three other actions at that time was on their understanding that no claims would be advanced by them. The evidence establishes that the initial tentative settlement of the three other claims was actually made within the time frame that the Scale statement of claim was issued and could be served. [44]      In the circumstances, was Cooperators entitled to settle those three actions exhausting its policy limits without risk that it may also have to pay out the additional claims of the Scale family members when they came to fruition?   [45]      In my view, Cooperators on the evidence was always aware of the risk of the Scale claims being advanced from the outset which they also would have known at the time of the settlement discussions on November 5, 2008 with the parties in the three other actions. No doubt those plaintiffs were also aware of Amanda Scale’s death throughout. Cooperators chose to settle those three actions without requiring any of those plaintiffs to proceed to judgment at which point it could have applied under s. 258(4) of the Insurance Act to have the total proceeds paid into court. The court could then have required the appropriate evidence to determine whether and to what extent any other potential claimants against the policy including the Scale family members should be included for the purpose of this distribution of the total policy limits on a pro rata basis to all of the claimants. Again, Cooperators did not impose a term of the three settlements reached that they were on the basis of the Scales not being entitled to a claim against the policy limits. [46]      The Court asked Cooperators’ counsel whether Cooperators would have proceeded in the same fashion as it did if the accident had involved to Cooperators knowledge a catastrophically injured minor passenger who had not yet formally notified the defendant driver or Cooperators of his claims potentially exceeding $10 million instead of the remaining Scale family members’ claims. Mr. Rachlin in his usual candour admitted that Cooperators would not likely have settled the three other actions without consideration of that minor’s claims being included against the policy limits. [47]      In my view, it should make no difference in the approach Cooperators ought to have taken in this case with respect to the surviving Scale family members.

It was held that the “first past the post” principle does not apply to claims under section 258 of the Ontario Insurance Act:  

​[48]      Cooperators suggests that the common law “first past the post” principle applies to the Scale plaintiffs’ claims against its policy. It states that Cooperators is required to settle injured parties claims expeditiously and is entitled to settle and pay those claims as they are made reducing or eliminating the policy limits and its obligations under the policy if it has no knowledge of any further claim and where those settlements are concluded after the Scale family claims limitation period expired and the time under the rules for service of their statement of claim had expired.   [49]      I disagree with that submission for the following reasons.   [50]      Firstly, Cooperators was aware of the potential claims of the Scale family members from the outset of the accident or shortly thereafter. It did nothing to follow up on that acquired knowledge to ascertain whether in fact those claims were being pursued. The Scale action was commenced within two years of the date of the accident.   [51]      The settlements of the three actions were reached without consideration of the potential Scale claims.   [52]      Cooperators made no search or inquiries with respect to the potential issuance of the statement of claim of the Scale family members.   [53]      As indicated above, Cooperators would not likely have settled those three actions had it known of the potential claim not yet advanced of a catastrophically impaired minor if there had been one. In my view, the Scale Family Law Act claimants should have been treated the same way . [54]      Secondly, allowing for insurers to pay out competing claims on a “first past the post” basis until their limits are exhausted does not apply in my view to s. 258 of the Insurance Act involving motor vehicle liability policies. S. 258, as indicated above, provides for the statutory claim of entitlement of injured persons against the policy proceeds. . . .   [59]      I accept that at common law and in the context of non-automobile claims, it has been held that the prevailing rule is “first past the post” under which claims may be paid out as soon as they have been determined by settlement or judgment. Hilliker, Liability Insurance Law in Canada page 91. I also agree with the learned author’s statement that in the case of automobile claims, however, it has been held that the pro rata approach should generally prevail and that the rule should not be departed from except in special circumstances.  

The explanation that has been given for the different treatments of the two types of claims is that under the general insurance legislation, the claimant’s right to seek recovery from the insured does not crystallize until judgment whereas under the more specific legislation pertaining to automobile insurance, an injured party has an immediate and actionable interest.

The Court also rejected the insurer’s argument that “the Scale family members did not have ‘a claim’ as defined under s. 258 of the Insurance Act at the time it settled the three other actions”. The Court went on to hold as follows:  

[77]      Lastly, in balancing the competing claims of the Scale family members and the interests of Cooperators, it must be remembered that s. 258 of the Insurance Act is remedial consumer protection legislation which crystallizes the rights of the Scale family members in the Cooperators policy funds available immediately at the time of the accident. The obligation of Cooperators under the policy is to investigate all of the potential claims against its insured and attempt to resolve them for the purpose of avoiding any potential exposure of its insured claims in excess of the policy limits.  

COMMENTARY:  Though this was an Ontario judgment, insurers should be wary of privately settling claims with parties injured or killed in automobile accidents without having first ensured that no other claims have been initiated. Though counsel for the Respondent twice reached out to the Estate of S, the Court still found that the insurer should have been aware that claim could still be brought within the limitation period.