EXECUTIVE SUMMARY: October 25, 2012 marks the one-year anniversary of the Ontario
Court of Appeal’s decision in Zurich v. Ison T. H. Auto Sales Inc. The judgment remains
noteworthy in that reminds us of the important role an insured has with respect to an insurer’s
recovery efforts in at least the following three ways:
1. Until the Insurer has fully indemnified the Insured, the Insured has conduct of the
subrogated litigation. In other words, transfer of the right of subrogation to the
Insurer, as per the insurance policy, occurs only once full indemnity is provided,
including the deductible and uninsured losses.
2. Because full indemnity is a legal prerequisite to initiation of a subrogated action,
subrogation agreements are an important mechanism of ensuring both the Insured and
the Insurer are cognizant of their respective rights and those of the other and of
preempting preventable disputes regarding, among other things, carriage and control
of the litigation, apportionment of recovered proceeds, legal costs and disbursements.
3. Maintaining a positive working relationship with an insured is important not only
with respect to the who, when and how of subrogation, but also the ultimate success
of the Insurer’s recovery efforts. In particular, the Insured’s cooperation is crucial to
establishing liability and damages.
FULL ARTICLE:
Due to the very nature of the doctrine of subrogation, long-rooted in the common law and equity, the Insured is key to the Insurer’s successful hassle-free recovery.
At common law and equity, an insured must be fully indemnified before an insurer acquires its
subrogated rights. This is because the claim rests with the party who has suffered the loss: until
the Insurer has paid, that party is the Insured; once the Insurer has paid, then it is the Insurer who
has suffered the loss. This rule has been codified (albeit slightly modified) by legislation. In
British Columbia, s. 36 of the new Insurance Act, SBC 2012, c 37, stipulates as follows:
(1) The insurer, on making a payment or assuming liability under a contract, is
subrogated to all rights of recovery of the insured against any person, and may bring an
action in the name of the insured to enforce those rights.
(2) If the net amount recovered after deducting the costs of recovery is not sufficient
to provide a complete indemnity for the loss or damage suffered, that amount must be
divided between the insurer and the insured in the proportions in which the loss or
damage has been borne by them respectively.
Subsections 84(1) and (2) of B.C.’s Insurance (Vehicle) Act, RSBC 1996, c 231, are to similar
effect as the above; but, the provision provides further guidance. For one, the Insurer has conduct
of the litigation if the Insured’s interest is limited to loss of or damage to a vehicle or loss of its
use: s. 84(3). Parties may apply for judicial determination of issues on which disagreement exists
with respect to the subrogated action itself, instructions to counsel, settlement offers, costs or
appeals: s. 84(4). Evidence used or taken on a s. 84(4) application is inadmissible at trial: s.
84(5). Lastly, a settlement or release does not restrict s. 84 rights unless the Insured or the Insurer
concurred: s. 84(6).
Some 20 years ago, the British Columbia Court of Appeal considered whether s. 224 of the
Insurance Act (predecessor to what is now s. 36) and s. 271 of the former Insurance (Motor
Vehicle) Act (predecessor to what is now s. 84) derogated from the common law rule requiring
full indemnity before subrogation in Farrell Estates Ltd. v. Canadian Indemnity Co. (1989), 37
BCLR (2d) 154 (SC Chambers), aff’d (1990), 45 BCLR (2d) 223 (CA), wherein our own Rick
Twining, now Q.C., acted for the Defendant.
The lower court judge and the appellate court both determined that while the legislation may
have altered the common law position by allowing an insurer to act upon its rights of subrogation
even where there has been only partial indemnity or, even less, an assumption of liability, the
legislation did not go so far as to afford the Insurer the right to exclusive conduct of the
subrogated action. Conduct of the litigation remains with the Insured until full indemnification
occurs. Precise policy language is required to take away an insured’s right at common law.
Zurich Insurance Company Ltd. v. Ison T. H. Auto Sales Inc., 2011 ONSC 1870, supp reasons
2011 ONSC 2511, aff’d 2011 ONCA 663, further confirms the reasoning in Farrell Estates.
In this case, a fire and explosion at an apartment building, wherein the insured dealer stored
some 70 new cars in rented space of the underground parking lot, resulted in a pay out of $1
million (less salvage) under first-party coverage. The uninsured portion, representing losses of
profit and goodwill, totaled $700,000. Ison, thereafter, initiated action against the alleged
tortfeasor seeking recovery of the insured and uninsured losses.
Zurich sought carriage and control of the litigation on the bases of a clause in the policy that
subrogated to it all rights of the Insured upon payment, and monetary discrepancy between
Ison’s ‘soft’ $700,000 claim and Zurich’s ‘hard’ $1 million claim. Alternatively, Zurich
submitted it ought to have meaningful participation in the action and command of its subrogated
claim except on common liability issues. Zurich further complained that Ison breached its duty to
cooperate and good faith obligations by barring attendance of Zurich’s counsel at discoveries.
Zurich’s application was dismissed; so, Ison retained carriage and control of the litigation. The
Ontario Court of Appeal upheld this decision, calling the applications judge’s analysis masterful.
Consistent with Farrell Estate, the applications judge found that the standard policy subrogation
clause does not change the well-established common law principle that an insured retains
conduct of the subrogated litigation, should he/she/it choose to do so, until said insured has been
fully indemnified for all losses – insured and uninsured.
Additionally, there is no reason to imply a term giving an insurer greater subrogation rights in
order to give business efficacy to the insurance policy. Rather, the effect of the subrogation
clause was to entitle the Insurer to a proportionate share in any recoveries and to impose on the
Insured a duty to consider the Insurer’s interests, keep it informed of the status of the litigation,
including major issues, and consult with the Insurer regarding prosecution of the claim.
However, the judge noted that the Insurer could have protected itself by writing into the policy
an express condition giving rights over conduct of the litigation to the Insurer regardless of
whether an insured has been fully indemnified. Although, he recognized that sophisticated and
powerful insureds, such as banks, might find such language unacceptable. The judge also
acknowledged that carriage and control might be transferred to an insurer where its interests are
so vastly disproportionate to an insured’s interest, but declined to offer guidance as to what
constitutes vastly disproportionate.
The present state of the law means that even if the Insured had no losses that were excluded or
subject to policy limits, but is owed a deductible, he/she/it has legal conduct of subrogation.
In our experience, however, once insureds’ claims are substantially paid out (total insured loss
less any outstanding deductible), they have little interest, financial or otherwise, in being
involved with their insurers’ recovery efforts. Even where an insured sustained uninsured losses,
he/she/it often elect not to join in the subrogated action on the basis of economic prudence,
namely the risk that pro-rata sharing of legal costs may outweigh any recovery gained.
By way of a caveat, where first party coverage has not concluded by the time a subrogated action
commences, to avoid conflicts of interest, we must bring to the Insured’s and the Insurer’s
attention the fact that (1) our retainer is limited to pursuing recovery of monies the Insurer paid
out the Insured to date; (2) we have to duty to make available all information received as a part
of the joint representation to both the Insured and the Insurer, and to end the retainer should a
conflict of interest arise between them; and (3) we cannot provide advice to either the Insured or
the Insurer regarding their rights against the other.
Nevertheless, regardless of an insured’s general lack of interest in subrogation, cooperation from
the Insured is key to the Insurer’s recovery, because should a dispute arise as to carriage and
control of the litigation or, worse, legality of a settled or judicial outcome of subrogation, Courts
are (by and large) inclined to give an insured ‘the benefit of the doubt’, pursuant to the contract
interpretation doctrine of contra proferentem. Thus, making sure all parties are cognizant of their
own rights and those of the other will go a long way in preempting foreseeable issues.
Drafting and entering into a subrogation agreement as early as possible is an effective method of
ensuring all parties understand the stakes and each other’s rights. Subrogation agreements are
typically used to iron out details relating to choice of counsel, conduct of the litigation,
apportionment of recovered proceeds, payment of legal fees and disbursements, procedures for
resolution of disagreements, and (if phrased appropriately) may be a means of weakening the
stringency of the common law.
The Court in Ison emphasized that it is prudent (especially in large loss claims) for insurers and
insureds to discuss subrogation at the time the claim is being paid. Ideally, at the adjusting stage,
the adjuster should identify any uninsured losses and seek to have the Insured execute a
subrogation agreement transferring carriage and control of the subrogated action to the Insurer.
Often, we take the steps of getting a subrogation agreement in place, because they are rarely
entered into at the adjusting stage. To discharge our ethical obligations (since counsel acts for
both the Insurer and the Insured), upon issuance of a standard subrogation agreement to an
insured for signature, we will advise him/her/it to obtain independent legal advice as to form,
content and implications prior to execution.
Maintaining a positive working relationship with an insured is important not only with respect to
the who, when and how of subrogation, but also the ultimate success of an insurer’s recovery
efforts. Unlike defence files, subrogation means the burden of proof rests upon us to discharge.
An insured’s cooperation with the subrogated litigation is, thus, crucial. Indeed, he/she/it has
first-hand knowledge of the tortfeasor’s wrongdoing and will, therefore, be in the best position to
testify on liability and quantum of damages. The Insured is needed at discoveries, Small Claims
Court mandatory settlement conferences, mediation and trial. An insured must also, barring a
subrogation agreement to the contrary, consent to any settlement reached and thereafter
execution of releases and discontinuance of the action.
In light of the foregoing, the Insured should be notified of the Insurer’s intention to subrogate
from the outset of the reported loss, warned not to do anything that may jeopardize the Insurer’s
subrogation rights, and encouraged to communicate concerns to appointed counsel. (00882-LHL)
Prepared by Michael Silva and former WT associate Lori Leung.
