Pursuing Insureds for Reimbursement where the Insurer denies coverage and settles the Plaintiff’s Claim

How should an insurer pursue their insured for reimbursement where the insurer has taken an off-coverage position in the main action and has settled the plaintiff’s claim? Master Dash recently considered this issue in Economical Mutual Insurance Co. v. Montgomery 2013 ONSC 6153. The case is a good reminder that certain procedural steps are critical to an insurer’s successful pursuit of the insured for recovery. The motion at issue came about somewhat unusually, and the procedural history is a bit complex:

• The action arose when the plaintiff was struck and injured by a motor vehicle operated by the insured’s son Randy, who was unlicensed. The insured, Sadie, admitted to Economical that she permitted Randy to operate the vehicle despite knowing that he was unlicensed. Economical took an off-coverage position in the main action.
• Sadie executed a non-waiver agreement to allow Economical to participate in the main action without waiving its rights under the policy.
• Economical sent letters to both Sadie and Randy to put them on notice that Economical was required to respond to the claim up to $200,000, that Economical had the right to recovery against them, and that it would seek reimbursement from them of any monies paid in the main action up to $200,000.
• The Statement of Claim was not actually served on Sadie and Randy until 13 months after it was issued. They then forwarded the document to Economical.
• Sadie claims that she was not advised that she had the right to retain counsel personally to defend the claim.
• Counsel for Economical wrote to the plaintiffs’ lawyers on March 11, 2010 to advise that they would be bringing a motion to add themselves as statutory third party, and that they would be in a position to deliver a defence after that time. However, Economical did not defend the claim and took no steps to add itself as a statutory third party. Instead, it settled the plaintiffs’ claims for $177,000 all inclusive.
• The plaintiffs executed a “Full and Final Release and Assignment of Cause of Action”, thereby transferring their rights against Randy and Sadie to Economical.
• Economical’s lawyers wrote to Randy and Sadie advising them of the settlement, that the insurer was “now entitled to pursue [them] to recover” $177,000, and that such remedy could be pursued either in Economical’s name, or by continuation of the plaintiffs’ action. Randy and Sadie did not respond to Economical’s letters following the settlement.
• Economical then served Randy and Sadie with a motion to add the insurer as a statutory third party, but soon discovered that the action had been dismissed as abandoned by the Registrar as no defence had been filed.
• Justice Conway set aside the dismissal order, but declined to add Economical as a statutory third party because Economical wanted to enforce its rights as assignee of the plaintiffs rights, but did not seem to be using the correct procedure. The court suggested that counsel review Rule 11 pertaining to orders to continue, and the procedures for noting in default and for obtaining default judgment as an assignee of rights.
• Economical subsequently obtained an Order to Continue, and replaced the plaintiffs with Economical in the title of proceedings. The defendants were then noted in default. However, Economical gave Randy and Sadie no notice of the noting in default.
• On March 6, 2012, Economical applied for default judgment under rule 19.04(1)(a) for “a debt or liquidated demand for money”. The Registrar declined on two bases:
  1. The Statement of Claim had been served outside of the six month deadline for service set out in Rule 14.08; and
  2. The principal amount claimed appeared to be based on a settlement the parties had reached (i.e., a subrogated claim). The Registrar does not have jurisdiction under Rule 19.04(1) to grant judgment for unliquidated debts; only a judge can sign judgments for unliquidated debts under Rule 19.05.
• Economical then served Randy and Sadie with two more motions on July 24 and August 21, 2012 to add Economical as a statutory third party, to add Economical as a plaintiff as assignee of the original plaintiffs’ rights, and for an order that Economical have judgment against Randy and Sadie in the sum of $177,000 “in its capacity of statutory third party and assignee of the Plaintiffs’ rights.”
• Randy and Sadie immediately retained counsel, and the motions were adjourned. In the interim, counsel for Randy and Sadie served a motion to set aside the noting in default. All of the motions were heard before Master Dash at the same hearing.

Whether judgment could be obtained by Economical

Based on the decision of McLean J. in State Farm Mutual Automobile Insurance Co. v. Mawere, [2012] O.J. No. 2500 (S.C.J.), Master Dash observed that there are three bases upon which an insurer could seek reimbursement where the insurer was alleging breach of contract:

1. There was a judgment against the insured;
2. There was an express non-waiver or reimbursement agreement between an insured an its insurer concerning the amounts paid by the insurer to a third party in respect to a claim against the insured; or, lastly perhaps,
3. An assignment of the cause of action had been obtained by the insurer as part of its settlement with the third party.

In accordance with the Court of Appeal’s decision in Lockhard v. Quiroz (2006), 83 O.R. (3d) 797, Master Dash noted that Economical could not rely on section 258(13) of the Insurance Act to recover payment from Randy and Sadie because the plaintiffs had not obtained judgment against them. Although the O.A.P. No.1 authorized an insurer to directly settle a plaintiff’s claim against the insured without their consent, due to the operation of section 258(1), it could not bind the insured to a judgment against them for the amount of the settlement.

Master Dash further held that Economical was unable to rely on non-waiver agreement, which stipulated that:

“The Insurer may settle and pay any claim, settle any action, or pay any judgment without notice to the Insured, and amounts paid by the Insurer in respect of the occurrence may be recovered by the Insurer from the Insured if, in an action subsequently commenced, it is determined the Insurer was not legally obligated to the Insured under the policy.” [emphasis added]

There were two problems with the manner in which Economical was now proceeding as far as Master Dash was concerned: (a) the coverage action had not been subsequently commenced, and Economical was a party to the original action by way of the assignment of rights and the Order to Continue; and (b) nothing in the pleadings in that action alleged that Randy and Sadie had breached the policy or that they had an obligation to indemnify Economical for any damages paid to the plaintiffs.

In Master Dash’s view, the correct procedure was for the insurer to commence a separate action against the insured for the settlement amount in which it was pleaded that the insured had breached the terms and conditions of the policy. This procedure was to be followed to establish not only that the insured had breached the policy and was therefore not entitled to coverage, but also the reasonableness of the settlement where there had been no judgment.

Finally, Master Dash considered the Assignment of Rights. He observed that Economical could seek to obtain judgment against the defendants on the claim by wearing the hat of the plaintiffs in the main action (the ultimate adjudication of which would have to be made by a judge). As Randy and Sadie had been noted in default, liability would be deemed admitted, but Economical would have to prove damages in the same manner as if it stood in the shoes of the plaintiffs. Indeed, Economical had included in their motion materials affidavit evidence speaking to the plaintiff’s injuries. It was Master Dash’s view that any resulting judgment would bind Randy and Sadie to the quantum if it were found in a subsequent action that Economical was not obligated to indemnify them under the policy. What such a judgment could not do is determine whether an obligation existed on Economical to indemnify Randy and Sadie under the contract. There was nothing in the pleadings to frame a coverage dispute, and that issue would remain undecided.

Master Dash ultimately determined that if he did set aside the noting in default, Randy and Sadie would be able to raise against the plaintiffs (or Economical as the assignee of their rights), issues of both liability and quantum of damages. The coverage issue would be determined in a separate proceeding unless the existing pleadings were amended to include the issues of coverage, indemnity and reimbursement. However, if he did not set aside the noting in default and Economical obtained judgment as assignee, the insurer would have a judgment enforceable against Randy and Sadie without the issues of coverage having ever been determined. The possibility of reaching this result clearly did not sit well with the court.

The Noting in Default

Given this situation, Master Dash held that the noting in default ought to be set aside. The law as set out by Ducharme J. in Enbridge Gas Distribution Inc. v. 135 Marle Holdings Inc., [2005] O.J. No. 4327, conferred a broad discretion on the court, and involved the consideration and application of several factors:

• The behaviour of the plaintiff and defendant (whether there was a continuing intention to defend);
  • Is there believable evidence that the defendant had an intent to defend?;
  • The length of the defendant’s delay;
  • The reasons for the delay;
  • What prevented the defendants from responding to the Statement of Claim in a timely fashion;
  • Has the motion been brought with reasonable dispatch; and
  • The complexity and value of the claim;

On receiving the Statement of Claim, Master Dash held that Sadie had done what any other insured would do – deliver the document to her insurer so her interests could be defended. This demonstrated a continuing intent to defend, since it was reasonable for Sadie to believe that Economical would defend the claim up to $200,000. In this regard, he held that Economical had made statements to Randy and Sadie that they would respond to the claims up to $200,000, Economical had written to the plaintiffs’ lawyers to advise that Economical would defend the claim once added as a statutory third party, and Economical had failed to advise Sadie that it would not defend the claim and that she had the right to retain counsel personally. Moreover, Master Dash held that Sadie was entitled to rely on the wording of the non-waiver agreement, which stipulated that the coverage issue would be determined in a separate proceeding. It was not until Economical’s motion for judgment that it became clear to Randy and Sadie that Economical was actually taking steps to seek reimbursement. Simply put, Randy and Sadie were prevented from responding to the original Statement of Claim in a timely fashion because had they reasonably left it to Economical to defend the claim against them.

Within a month of being served with the motion for judgment and other relief on August 21, 2012, Randy and Sadie had retained counsel, who moved with reasonable dispatch in seeking to set aside the noting in default. Again, it was not until they received those motion materials that they would have known that they were in default in November, 2011, as the noting in default had been obtained without notice to them. As such, Master Dash held that the reason for and length of the delay had been explained.

Finally, Master Dash would have overturned the noting in default notwithstanding the above analysis because it was made in reliance on improper service, and was of no effect. The delay in serving the Statement of Claim on Randy and Sadie was never explained, and there was no order validating service. Therefore, service of the Statement of Claim was of no effect.

Conclusion

The court’s decision in Montgomery serves as a warning to insurers to carefully consider their procedural obligations when seeking reimbursement of monies paid out on claims from their own insureds. It is critical to understand that any coverage dispute between the parties to the insurance contract is distinct and separate from the action by a plaintiff seeking recovery of damages. For example, in Mawere, the insurer paid a settlement to the injured claimant, yet no action had been started by the claimant, no judgment was obtained, no assignment of the claimant’s cause of action was made, and there was no agreement or non-waiver between insurer and insured as to the payment made by the insurer. As such, the court determined in Mawere that the insurer had no status to bring action against its insured.

If an insurer wants to protect its interests, the decision of Master Dash holds (at paragraphs 26 – 29, and 34 – 36) that the insurer ought to add itself as a statutory third party, defend the claim, and pursue reimbursement from the insured in that capacity. The proper procedure would also require the insurer to commence a separate action against the insured, seeking a declaration that the insured is not entitlement to indemnity under the policy by virtue of the breach of one or more of it’s terms and conditions, and for recovery of any amounts paid out in the main action. This would be necessary, for example, if the insured has not otherwise defended the plaintiff’s claim, and has not sought a declaration of entitlement to indemnity under the insurance policy against the insurer in their Statement of Defence and Crossclaim.

Overall, Montgomery demonstrates that if an insurer fails in its procedural obligations, it is risking the ultimate success of any attempt to bind the insured to a settlement before judgment with a plaintiff. At best, such procedural breaches may result in expensive delays. At worst, they may fatally compromise an insurer’s ability to recover from the insured person at all.