The 2006 decision of the Alberta Court of Queen's Bench inMcConnell v. Aviva Insurance Co. of Canada Ltd. ("McConnell"), serves as an interesting commentary on the potential liability of insurers with respect to unsatisfied judgments obtained against their insureds. The result reached by the court also provides a cautionary tale to insurance defence counsel about the defence of claims where an insured's employees are named personally.
The facts in McConnell are not remarkable. The plaintiff, Edith McConnell ("McConnell"), hired deCou Holdings Ltd., a moving company, to move her personal belongings from Alberta to British Columbia. Two of deCou's employees, Patrick Mallette ("Mallette") and Joseph Robichaud ("Robichaud"), were involved in transporting her goods. While the property was in transit, a fire erupted in the moving truck, resulting in the destruction of McConnell's belongings. McConnell sued deCou as well as Mallette and Robichaud personally, alleging breach of contract and gross negligence.
DeCou held a Cargo Insurance Policy that was purchased through a predecessor of Aviva Insurance Company of Canada. The policy limit was $80,000, with a $1,000 deductible. DeCou was the only named insured under the policy. Though some contracts of insurance expressly define the term "insured" to include employees of a named insured while acting within the scope of their employment, the Aviva policy did not. Nevertheless, Aviva instructed its solicitors to defend the action on behalf of both deCou and the two employees.
Mallette was contacted and advised of the action but disappeared before the examinations for discovery, not to be found again. Robichaud was never located and, to the knowledge of those involved, never informed of the action. As a result, McConnell filed a contempt application against the two employees, which was defended by Aviva's solicitors on their behalf. McConnell was successful in having the employees' pleadings struck and judgment awarded against the employees in the amount of $155,093.68.
S. 530 of the Alberta Insurance Act
Not surprisingly, McConnell was unsuccessful in locating either employee to enforce the judgment. Having failed to collect her judgment from Mallette and Robichaud, McConnell's solicitors shrewdly moved to attempt to collect the $155,093.68 against Aviva itself. They did this by way of an application under section 530 of Alberta's Insurance Act, which provides as follows:
In any case in which a person insured against liability for injury or damage to persons or property of others has failed to satisfy a judgment obtained by a claimant for the injury or damage and a writ of enforcement against the insured in respect of the judgment is returned unsatisfied, the enforcement creditor has a right of action against the insurer to recover an amount, not exceeding the face amount of the policy or the amount of the judgment, in the same manner and subject to the same equities as the insured would have if the judgment had been satisfied.
The Ontario Insurance Act contains a provision that is similar in substance, being s. 132.
Estoppel by Representation
The first issue addressed by the court on the s. 530 application was whether the employees were 'insured persons' under the Aviva policy. Recognizing that many contracts of insurance expressly extend coverage to employees of the insured while acting in the scope of their employment, the court found that the logical conclusion to be drawn from Aviva's failure to include such an express provision was that the insurer did not intend to extend coverage to employees. Accordingly, the court concluded that Robichaud and Mallette were not insureds under the terms of the policy. Nevertheless, the analysis did not end there. McConnell then argued that Aviva was bound to treat Robichaud and Mallette as "insureds" under the policy on the basis of the doctrine of estoppel by representation. Because Aviva's solicitors defended the McConnell action and the contempt application on behalf of the employees, McConnell argued that Robichaud and Mallette detrimentally relied upon Aviva's representation that they were covered under the policy. Consequently, Aviva was estopped from subsequently taking the position that the employees were not covered under the policy.
The court then dealt with each employee individually. Robichaud went missing prior to the commencement of the initial action and was never located. Accordingly, the court held that Robichaud could not have relied on Aviva's representation of coverage to his detriment and, consequently, that Aviva was not estopped from denying coverage to Robichaud in accordance with the terms of the policy.
Mallette, on the other hand, was aware of the initial action. The court found that he had been prejudiced by a false sense of security that Aviva would cover any award granted to McConnell. Because Aviva chose to defend him from the commencement of the action, the insurer was estopped from denying coverage.
An alternative defence offered by Aviva was that Mallette had voided his coverage under the policy by failing to cooperate in the defence of the action, a requirement of insureds under Aviva's policy. The court noted, however, that Aviva continued to defend Mallette long after it knew about his non-compliance. As a result, Aviva was precluded from now asserting this as a breach of the policy.
Scope of Recovery under s. 530
Having found that coverage was to be afforded to Mallette under the Aviva policy, the final consideration for the court was whether Aviva was liable to pay McConnell the full $155,093.68 judgment obtained against the employees. s. 530 of the Insurance Act specifically limits a creditor's right to recover against the insurer for an unsatisfied judgment to an amount "not exceeding the face amount of the policy or the amount of the judgment".
McConnell argued that the restriction of recovery up to policy limits under s. 530 should not apply in this case as Aviva failed to advise Mallette of the policy limit and his potential personal liability for a judgment in excess of the limit. Again, McConnell's argument was rooted in estoppel.
This argument was rejected. On a strict reading of s. 530, the court found that the amount that McConnell was entitled to recover from Aviva on the judgment obtained against the employees was restricted to the policy limit of $79,000 (being $80,000 minus the $1,000 deductible).
Conclusion: The Insurer Must Pay
Finally, the court considered whether Aviva was still able to raise a defence on behalf of Mallette on the merits of the case and in turn avoid liability under s. 530. The court found that in circumstances where the insurer had the opportunity to contest liability at an earlier stage in the proceedings, it is not entitled to reopen the merits of the judgment at a later stage.
In the result, Aviva was precluded from denying coverage to the insured's employee and avoiding payment of a $79,000 judgment in relation to that employee, largely because of the manner in which it instructed and/or allowed its solicitors to defend the McConnell action on behalf of the insured. Thus, irrespective of the court's finding that the terms of the policy did not extend coverage to the insured's employees, Aviva was stuck with the $79,000 bill.
McConnell serves as a warning to insurers and insurance defence counsel alike to step cautiously when planning and executing a defence to an insured's action. The result in this case could have been avoided by simply defending the named insured or defending the employees pursuant to an appropriately worded Preservation of Rights Agreement.