In settling three actions by paying out an entire policy limit pro rata, an insurer was taking the risk it would later be found liable for further claims up to that same limit. That was the lesson learned in the Ontario Superior Court ruling in Scale Estate v. The Cooperators General Insurance Company.
The case dates to a 2006 automobile accident, in which three people were injured and three people killed, including the driver. The driver's vehicle was insured with the defendant insurer under a standard automobile policy with $1 million in third-party liability insurance limits. Three actions, none of which were initiated by the plaintiffs, were brought with notice against the driver's estate as a result of the accident. Though the insurer's adjuster reached out twice to the plaintiffs' broker, it was not apparent that the plaintiffs would also bring an action. The insurer heard nothing further from the plaintiffs until after settlements were concluded with the other claimants, and the $1 million in policy limits had been apportioned pro rata.
The plaintiffs took action against the insurer claiming entitlement to have their damages paid under the policy, or a pro rata share of the $1 million limit. In reply, the insurer claimed it had acted in good faith by paying out the policy limits in voluntary settlement of the three other actions. Also, it was not required to make any payment to the plaintiffs given that no amounts remained under the policy. The plaintiffs brought a motion for summary judgment for an order that the policy was liable to respond to the judgment they obtained against the driver's estate.
The insurer argued for a "first past the post" principle to be applied to the facts. Under the principle, the insurer would have been required to settle the injured parties' claims quickly and could settle and pay those claims provided that it had no knowledge of any further claim.
The Ontario Superior Court of Justice found that the insurer was aware of the plaintiffs' potential claims and had done nothing to follow up so as to ascertain whether they were being pursued. There was no evidence that the settlement of the three other actions had been on the insurer's understanding that the plaintiffs would not advance a claim. In the court's view, the insurer was always aware of the risk that the plaintiffs would start an action. The insurer could have imposed a term in the settlements making them subject to the plaintiffs not also being entitled to a claim against the policy limits.
Allowing the insurers to pay out competing claims on a first-past-the-post basis until the limits were exhausted would conflict with s. 258 of the Insurance Act, which provides:
''Any person who has a claim against an insured for which indemnity is provided by a contract evidenced by a motor vehicle liability policy, even if such person is not a party to the contract, may, upon recovering a judgment therefor in any province or territory of Canada against the insured, have the insurance money payable under the contract applied in or towards satisfaction of the person’s judgment and of any other judgments or claims against the insured covered by the contract and may, on the person’s own behalf and on behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.''
The court held that the first-past-the-post principle dealt with claims against general liability policies and did not apply to standard automobile policies under s. 258. Further, the court cited Re Aviva Canada Inc., for the principle that under specific automobile insurance legislation, an injured party has an immediate and actionable interest. As in Bartkow and Walker v. Merit Insurance, injured parties had a right to have insurance monies applied on their judgment – something an insurer could not limit, having chosen to make private settlements with other claimants.
The defendant insurer would not have had further exposure to the plaintiffs' claims if it had resolved all potential competing claims on a pro rata basis as contemplated in s. 258. Instead, it simply took on the risk that those claims could be advanced in the future. The insurer could not now argue that it had chosen to settle in good faith. It should have further realized that its exposure to other claims was not limited to the amount that could have been paid out on a pro rata basis if all four claims were required to settle together. The plaintiffs could not now take action against the settling claimants, as they had released their claims. The court therefore ordered that the money payable under the defendant's policy must respond to the judgment obtained by the plaintiffs up to the limit plus costs.
Scale Estate marks the first time that either of Re Aviva Canada and Bartkow has been cited in Ontario. Insurers in the province should accordingly be wary of privately settling claims with parties injured or killed in automobile accidents without having first ensured that no other claims will be initiated. Given that the first-past-the-post principle does not apply to motor vehicle insurance, insurers might have to pay out up to policy limits for any subsequent claim even if limits are exhausted. While the insurer in Scale Estate had inquired twice with the plaintiff's broker with regards to a claim, the Superior Court of Justice still found that the insurer should have been aware that a claim could later be commenced within the limitation period. Insurers must therefore be diligent in reaching out to potential claimants and determining whether they intend to bring an action or obtain a judgment.