O.J. No. 1487
2001 ONSC 1870
Ontario Superior Court of Justice
G.R. Strathy J.
March 25, 2011
The insured is an automobile dealer. An explosion and fire occurred at a building where the insured was storing 71 new cars. The cars were damaged and could not be sold as new. The insured made a claim under its policy and was paid a sum representing the factory invoice price of the vehicles less the deductible of $10,000. The insured was able to recover some funds in salvage for the cars and had a net subrogated claim of $1,000,000. The insured claimed that it had also suffered losses of profit as a result of damage to the cars, namely the difference between the manufacturer’s price and the price at which the vehicles could be sold to customers. As well, the insured claimed that it had lost the ability to service the 71 new automobiles and the opportunity to resell trade ins on those vehicles.
As a result of the fire, the insured commenced an action against the third party and included therein the insurer’s subrogated property claim. The insurers were aware that the insured had taken this action. Six months later the insureds retained a firm which asked to be added as counsel of record in the insured’s action. The insureds denied the request; they took the position that they would keep the insurers advised of developments but that ultimate control of the litigation would remain in the insured’s hand.
The insurers commenced this proceeding to seek an order that they are entitled to have carriage and control of this action with a right of full and meaningful participation in the conduct of the action and full control by them of the uninsured claim advanced.
The insurance policy at issue contained a provision under the heading “Release from Liability and Subrogation Clause” which provides that
[T]he insurer, upon making any payment or assuming liability therefor under this policy, shall be subrogated to all rights of recovery of the Insured against any person, and may bring action in the name of the insured to enforce such rights.
The insured took the position that the subrogation clause changes the common law rule and gives the insurer control of any litigation commenced against the third party. The insurer relied on the Supreme Court of Canada decision in Sommersal v. Friedman, 2002 SCC 59 (“Sommersal”).
The insured took the position that it is well settled law that until the insured has been fully indemnified for all its losses, insured and uninsured, it is entitled to control any litigation against the tortfeasor.
The Court agreed that at common law the insurer has no rights of subrogation until the insured is fully indemnified for all losses. However, the court noted the common law is often altered by contract or statute or both. The Court refers to s. 152 of the Insurance Act, R.S.O. 1990, c. I.8 which states:
(1) The insurer, upon making…or assuming liability therefor under a contract to which this Part applies, is subrogated to all rights of recovery of the insured against any person, and may bring action in the name of the insured to enforce such rights.
The Court noted that the subrogation clause in the insurance contract altered the party’s position from that found in the common law. The Court held that the subrogation clause permits the insurer to commence an action against the third party even before the loss has been fully paid, as long as it has either been paid part of the loss or has assumed an obligation to do so.
However, the Court held that the insurance policy contained no express provision about the right of either party to control the litigation. As such, the Court held that the question was whether the insurer’s entitlement to be subrogated to all rights of recovery of the insured and to bring an action in the name of the insured to enforce such rights carries with it the right to control the litigation.
The Court interpreted the B.C. Court of Appeal’s decision in Farrell Estates Ltd. v. Canadian Indemnity Co. (1990), 45 B.C.L.R. (2d) 223 (“Farrell Estates”). In this case, the B.C. Court of Appeal observed that there was no doubt that s. 224 of the Insurance Act of BC had affected a change in the common law by providing for a right of subrogation where there had been only partial indemnity of the insured. However, the Court also noted that there was no specific provision in the Insurance Act giving control of the litigation to the insurer. As such, the Court concluded that the insurer did not have such a right. The Court concluded that s. 224 had not changed the common law position that the insured was in control of the litigation until paid in full. The Court held that express and precise language is required to take away rights which the insured enjoyed at common law. The Court held if the insurer wishes to control the litigation then the contract of insurance must provide for complete indemnity of the insured and complete indemnity must be paid. The result is that if the insurance contract provides for a deductible, then the insured rather than the insurer will control the litigation.
The Ontario Superior Court of Justice adopted the reasoning of the BC Court of Appeal in Farrell Estates. The Court then considered whether the common law had been changed as a result of the Supreme Court of Canada’s decision in Sommersal. The Court held that there was nothing in Sommersal to suggest that the Supreme Court gave any consideration to the issue of the insurer’s right, having provided an indemnity, to control the prosecution of an action against the third party for recovery of both the insured and uninsured claims. The Ontario Supreme Court of Justice held that had it been the intention of the Supreme Court to overrule the principle that the insured is in control of the litigation until fully indemnified, or to effectively overrule the decision of the Court of Appeal in British Columbia in Farrell Estates, it would have done so. As such, the Court concluded that the weight of authority supports the conclusion that the insured is in control of the litigation until fully indemnified.
The Court concluded that there was nothing in the language of the subrogation clause to alter the insured’s right to control the litigation until such time as it had been fully indemnified. The Court held that an entitlement to control a litigation does not follow by necessary implication from the insurer’s right to be subrogated to the rights of insured and to bring action in the name of the insured. The Court held that the right to be subrogated to the rights of the insured means that the insurer is entitled to stand in the shoes of the insured for the purpose of asserting the insured’s legal rights against the third party. It does not mean that the insurer is entitled to assert claims of the insured in which it has no interest. As such, the Court dismissed the insurer’s application and held that the insured would remain in control of the litigation.