Releases of claims, vulnerable parties and the doctrine of unconscionability
On July 25, 2012, the Honourable Justice Burrows of the Alberta Court of Queen’s Bench released his judgment in the case of Nery v Nery. This case is significant because the Court set aside a release of claims reached between a third-party insurance adjuster and the Plaintiff based on the legal doctrine of unconscionability.
Nery demonstrates that releases of claims, while being important legal shields, are not always bullet-proof. When obtaining a release of claims, it is important to consider the circumstances of the other party and the terms of the settlement itself.
Nery v Nery arose from a car accident in which Ms. Nery was a passenger in a vehicle driven by her husband. Ms. Nery sued her husband, alleging that he negligently turned left across the path of an oncoming vehicle that had the right of way, a collision occurred and she suffered injuries as a result.
Approximately eight months post-accident, the third-party liability insurance adjuster offered Ms. Nery a settlement in the sum of $8,567.80, which she accepted in exchange for executing a release of all claims against her husband.
Over a year after the settlement was reached, Ms. Nery commenced an action against her husband, claiming that the settlement was unconscionable and that the release should be set aside.
Justice Burrows cited the four-part legal test for unconscionability as laid out by the Alberta Court of Appeal in Cain v Clarica Life Insurance Company.
Ms. Nery was successful in evidencing all four elements that needed to be proved in order for a release of claims to be set aside:
- A grossly unfair and improvident transaction
Ms. Nery convinced the Court that the settlement and the associated release grossly undercompensated her for loss of wages and general damages. There was a significant discrepancy between the damages Ms. Nery was able to prove and the amount of the settlement that she received. The Court determined that the settlement was made before Ms. Nery was properly assessed medically, due to the Section B insurer not authorizing treatment and diagnostic investigation despite a doctor ordering it. This was a significant factor in the finding that she was “grossly” undercompensated.
- Victim’s lack of independent legal advice or other suitable advice
Correspondence from the adjuster stated that if Ms. Nery did not understand the settlement position of the insurer in regard to the minor injury “cap”, she should seek legal advice. In response, Ms. Nery gave evidence that she did not seek legal advice because the adjuster informed her that she would not be able to recover more than $4,000 due to a “government law”. Based on this, the Court found that there was an absence of independent legal advice.
- Overwhelming imbalance in bargaining power
The Court cited Ms. Nery’s lack of experience in dealing with personal injury claims as evidence of an imbalance in bargaining power. The Court also noted that Ms. Nery was dealing with a separate Section B adjuster, and was confused about the nature of the relationship between her and the third party adjuster. She provided evidence to the effect that she thought the third-party adjuster was there to represent her interests.
- Other parties knowingly taking advantage of vulnerability
The Court found that the third-party adjuster was well aware of Ms. Nery’s vulnerabilities, including that Ms. Nery had limited financial resources even before the injury occurred, and would be desperate to settle and receive the funds. Ms. Nery’s difficulties with English were also a factor.
Nery v Nery not only demonstrates the need to consider the circumstances of the person you are attempting to obtain a release of claims from and the terms of the settlement itself, but also the particular importance of recommending independent legal advice in the case of potential inter-family lawsuits where family members are under the same policy of insurance. When the other party has not obtained independent legal advice, it would be prudent to obtain a signed statement, indicating that independent legal advice has been recommended and declined, before a release of claims is executed. While releases of claims offer substantial legal protection in most circumstances, Nery v Nery demonstrates their potential fallibility.