Contractual subrogation clauses are common in most insurance policies and allow insurers to recover damages from third parties who are liable to the insured for the loss paid by the insurer. While the language of the insurance policy may not require the insurer to share damages it recovers with the insured, s. 546(2) of the Alberta Insurance Act may automatically impose the obligation on insurers.
At common law, an insurer’s right of subrogation only arises once the insured has been fully indemnified by the insurer for the loss. The insurer then has the right to commence action against third parties in the name of the insurer.
Insurers, through contractual subrogation clauses, can modify the common law to establish a right of subrogation where the insured has not been fully indemnified for the loss (for example, where an insurer has paid the full extent of insurance proceeds available under the policy but the insured still has a loss).
In Alberta, section 546 of the Insurance Act establishes a statutory right of subrogation in addition to common law and contractual rights of subrogation. Section 546 applies to all types of insurance contracts. Like many contractual rights of subrogation, section 546(1) does not require an insurer to fully indemnify the insured before the right arises; the insurer need only make any payment or assume liability for making any payment under a contract.
Section 546 sets out some of the shared rights and obligations of the insured and insurer in a subrogated action. For example, subsection 546(2) requires that any net amount recovered by way of judgment or settlement, if there is insufficient funds to fully cover the insured’s loss, be split equally between the insurer and the insured proportionate to the loss borne by each of them. By way of example, if the total loss is for $90,000, the insurer has paid out $60,000 under the policy, and the insured has an uninsured loss of $30,000, the proceeds of any subrogated action will be divided 2/3rd to the insurer and 1/3rd to the insured. If the insurer only recovers $30,000 through its subrogated efforts, the insurer will retain $20,000 and give $10,000 to the insured.
While the Alberta courts have not extensively considered this provision, the Ontario Superior Court of Justice recently commented on the Ontario equivalent for automobile insurance, s. 278(2) of the Ontario Insurance Act. Section 278 contains almost identical language to s. 546(2) of the Alberta Insurance Act, although it only applies to policies for automobile insurance. That said, the Court provides helpful guidance to understanding the rights and obligations imposed by the legislation.
In Tuffnail v Meekes, 2019 ONSC 525 (“Tuffnail”), the insurer argued that under Ontario’s SEF 44 policy (the OPCF 44R), the insurer’s right of subrogation was contractual (rather than statutory) and therefore s. 278(2) did not apply. The insurer argued that the policy did not require proportionate sharing and, as such, it was not required to share any subrogated recovery with the insured until the insurer recovered more than what it had paid the insured under the policy.
The court rejected the insurer’s argument and concluded s. 278(2) required the insurer to share with the insured on a pro rata basis proportionate to the percentage of loss each bore until the insured had been fully indemnified for the loss. The court found that the contract was silent on whether proceeds must be shared on a pro-rata basis. Based on the principle of contra proferentum, silence on the issue was not sufficient to exclude the application of s. 278(2) of the Ontario Insurance Act. Therefore, the statutory requirements of s. 278(2) modified the contractual right of subrogation established under the OPCF 44R.
The Court reiterated and relied on the principle that neither the insured nor insurer could profit by way of subrogation. The insured can only recover up to full indemnity for the loss and the insurer cannot recover more by way of subrogation than what it must pay the insured under its contract.
As the language in s. 278(2) of the Ontario Insurance Act is almost the same as s. 546(2) of the Alberta Insurance Act, the decision in Tuffnail will likely be persuasive in Alberta. An insurer should therefore keep in mind that, where a policy is silent with regard to apportionment of subrogated recovery, the insurer will likely need to share the proceeds on a pro-rata basis with the insured.
The Court did not comment, however, on whether the statutory requirement would automatically modify a contractual right of subrogation that clearly stated the insurer was not required to share proceeds of subrogation until the insurer had recovered the full amount it had paid to the insured. It remains to be seen what a court would rule in this situation.
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