By: Daniel Hinds
In the context of insurance claims where criminal conduct is involved, insurers may seek to recover monies paid to and on behalf of their insureds for resultant losses under cyber-fraud policies by establishing that they are entitled to the seized property by way of subrogation under the Criminal Code. In the Ontario Court of Appeal’s recent decision R. v. Travelers Insurance Company of Canada, the court held that establishing the existence of a constructive trust on the basis of unjust enrichment is sufficient for an insurer to claim an interest in the seized property that would otherwise be forfeited to the Crown, thus entitling an insurer to relief from forfeiture of the monies recovered under section 462.42(1) and 462.42(4) of the Criminal Code.
The Facts
Between 2020 and 2021, convicted felon Sebastien Vachon-Desjardins perpetrated a series of ransomware attacks, targeting a variety of institutions both internationally as well as in Canada. In doing so, he illegally collected sensitive data from victims and held it for ransom, demanding payment in Bitcoin for the return of the data. If the ransoms were not paid, Mr. Vachon-Desjardins would release the stolen information. The damage done by Mr. Vachon-Desjardins was immense. After he was caught and pleaded guilty to criminal charges, more than $700,000 in cash and roughly 68 Bitcoin were forfeited to the Crown as proceeds of crime under section 462.37(2.01) of the Criminal Code.
In the midst of Mr. Vachon-Desjardins’ criminal spree, Travelers Insurance Company was the insurer for two of his ransom victims, Technologies Xpertdoc Inc. and Robert Thibert Inc. Consequently, Travelers paid these two companies for losses incurred through negotiating and paying the ransom, obtaining and sending the Bitcoin, and other expenses caused by the ransom attack. In total, Travelers paid over $250,000 to Xpertdoc and approximately $1,000,000 to Thibert.
Seeking Restitution
During the restitution hearing, the Crown brought Thibert’s claim for a share of the seized property before the sentencing judge and Thibert received over $700,000 in restitution. However, the Crown “inexplicably and erroneously” did not present Xpertdoc’s claim to the sentencing judge. On top of this, the Crown failed to bring this omission to the sentencing judge’s attention. As a result, restitution was not paid to Travelers for the costs incurred by paying indemnity to Xpertdoc, and the funds were forfeited to the Crown.
Travelers then applied for restitution under section 462.42(1) of the Criminal Code. Put simply, this provision permits any person with a proprietary interest in property forfeited to the Crown to seek restitution of that property. In allowing the application in part, the application judge held that Travelers was entitled to the amounts paid by it as ransom to Mr. Vachon-Desjardins as insurer for Xpertdoc instead of it being forfeited to the Crown. However, the application judge dismissed Travelers’s claim for the other amounts claimed. These additional costs included amounts paid to Xpertdoc under its insurance policy for investigation fees, consultation fees, and legal fees.
In coming to this conclusion, the application judge reasoned that, apart from the ransom payment, Travelers was no more entitled to the forfeited property than an ordinary creditor. As such, they did not meet the necessary proprietary interest requirement for restitution under section 462.42(1) of the Criminal Code. You might ask why? According to the application judge, the money paid out by Travelers to their insured was never technically possessed by or paid to Mr. Vachon-Desjardins. As a result, Travelers could not claim the amounts beyond the ransom payment. Despite this finding, the application judge acknowledged that Travelers would have likely received restitution if the Crown had put the claim before the sentencing judge. However, she held that she had no jurisdiction to revisit the sentence unless the Crown or Mr. Vachon-Desjardins appealed.
The Appeal
On appeal, the Ontario Court of Appeal found in favor of Travelers, accepting the argument that the Crown was unjustly enriched and therefore, a corresponding constructive trust which was sufficient to satisfy the proprietary interest requirement in section 462.42(1) of the Criminal Code was created.
The Ontario Court of Appeal was careful to note that the Criminal Code’s restitution and forfeiture provisions do not necessarily make the Crown a guarantor or trustee for claims related to recovered property that are the proceeds of crime. In doing so, the court explained that the Crown’s erroneous failure to put Xpertdoc’s restitution claim forward or to notify the judge of its existence alone would be insufficient to sustain a claim of unjust enrichment and corresponding constructive trust over the property. However, these omissions, combined with near-certainty that restitution of the claim would have been ordered if the Crown had not failed to bring the issue before the sentencing judge, were enough to hold that the Crown was unjustly enriched at Travelers’s expense and without juristic reason. This in turn satisfied the proprietary interest requirement that Travelers needed in the forfeited property to bring forward a successful application for relief from forfeiture under section 462.42(4) of the Criminal Code. As a result, Travelers succeeded in obtaining an order for recovery of the additional money paid out to Xpertdoc beyond restitution related to the ransom payment by Travelers as their insurer.
What does this mean for Insurers?
As mentioned, the court was clear to state that this case turned on its “particular and narrow circumstances”. However, the result is that an insurer, upon seeking restitution under section 462.42(1) of the Criminal Code, may be able to establish the requisite proprietary interest in seized property by making a claim for unjust enrichment and a corresponding constructive trust over the seized property. As such, insurers may be able to recover more of their costs in these instances going forward.
Daniel Hinds is a summer student at ZTGH and the author of this blog. If you have any questions about this blog, please contact Daniel by email at [email protected].
