A recent decision of the Supreme Court of Canada, in a case from Quebec, confirms the wisdom of insurers’ longstanding practice of obtaining a transfer of their insureds’ rights when they pay claims. This is especially true when settling claims without admission of liability or where the insurer’s obligations under a policy may be uncertain. An insurer who sues a third party to recover the indemnity it paid, relying only on being legally subrogated to the insured’s rights, could find its right to take the action challenged.

DECISION OF THE SUPREME COURT OF CANADA IN ABB INC. V. DOMTAR INC.

Since 1976 in Quebec, an insurer who pays an indemnity to its insured is legally subrogated to the insured’s rights against the person responsible for the loss up to the amount of the indemnity it paid. Subrogation takes place, automatically without formality, upon payment of the indemnity.

In ABB Inc. v. Domtar Inc. – a case dealing principally with issues of manufacturers’ liability under Quebec law – the Supreme Court addresses the conditions under which legal subrogation arises in favour of insurers. The top court upheld Domtar’s position in the case, confirming both the decision and the reasoning of the Quebec Court of Appeal on this issue.[1]

Prior to the Domtar decision, no higher court in Quebec had expressly addressed the issue of whether an insurer will benefit from legal subrogation where it settles a claim without admitting liability and a court subsequently finds that the insurer was not required to pay the indemnity under the terms of the applicable policy. In Domtar, the appellants argued that once an insurer pays a claim made under a policy, the insurer is legally subrogated to the insured’s rights; a subsequent determination by a court that the damage was not covered by the policy will not change the essentially compensatory nature of the insurer’s payment and, therefore, will not alter the validity of the subrogation.

The Supreme Court did not accept the proposed reasoning. Instead, it held that under Quebec law, an insurer is not automatically subrogated to the insured’s rights unless the indemnity payment was actually required to be made under the terms of the applicable policy.[2]

Practically, this means that an insurer who relies only on legal subrogation when suing to recover its indemnity from a third party responsible for the damage, may find that its legal standing to sue is challenged on the ground that, on a proper interpretation of the policy or the facts of the case, the claim was not covered.

This recent decision, therefore, confirms the wisdom of longstanding insurance practice. Insurers – especially when settling a claim without admission of liability or where their obligations under the policy may be uncertain – would do well to obtain an appropriate transfer of their insureds’ rights at the time they pay a claim.

Ogilvy Renault represented the interests of Domtar Inc. in this matter.