2402. …Any clause of a policy whereby the insured consents, in case of loss, to effect an assignment of claim to his insurer that would result in granting his insurer more rights than he would have under the rules on subrogation is also deemed not written.
Underlying principle of subrogation is indemnification (not windfall or gain)
Idea of subrogation applies in damage insurance (property & liability)
Does not apply in life insurance
Life insurance is a non-indemnification type of insurance
idea of legal subrogation also diffuses the earlier concern of added risk with respect to intentional acts and hypothecary creditors (two-contract theory). The insurer can become a subrogated creditor and pursue the insured for his / her intentional act.
To further explain, imagine in this scenario of an intentional act by the insured, the insured party now becomes a 3rd party damager and the bank then becomes the only ‘insured’ in the contract. Therefore, the insurer pays the bank and steps into their shoes to go after the 3rd party.
There’s a limit to subrogation:
CCQ 2474…The insurer may never be subrogated against persons who are members of the household of the insured.
Household is not taken to be a literal definition; partly a function of the relationship
But what if the member of the household has a liability insurance policy?
Allstate insurance gives the answer to this and the answer was no because you can’t do indirectly what you can’t do directly
Punitive Damages
Whiten v. Pilot Insurance Co., 2002 SCC 18 – CML
Punitive damages
Facts: The appellant house caught on fire on night. Their family fled the house wearing only their night clothes. It was minus 18 degrees Celsius. The husband gave his slippers to his daughter to go for help and suffered serious frostbite to his feet. The fire totally destroyed the home and its contents, including three cats. The respondent insurer made a single $5,000 payment for living expenses and covered the rent for their temporary cottage for a couple of months or so, then cut off the rent without telling them. The appellant’s family was in very poor financial shape. The respondent also then alleged that the family had torched its own home, even though their was no air of reality to this claim. The jury awarded compensatory damages and $1 million in punitive damages. A majority of the Court of Appeal allowed the appeal in part and reduced the punitive damages award to $100,000.
Issue: Whether policyholder entitled to award of punitive damages__ Whether jury award of $1 million in punitive damages should be restored.
Held: Yes. Yes.
Reasoning:
The jury’s award of punitive damages, though high, was within rational limits. The respondent insurer’s conduct towards the appellant was exceptionally reprehensible.
It forced her to put at risk her only remaining asset (the $345,000 insurance claim) plus $320,000 in costs that she did not have. The denial of the claim was designed to force her to make an unfair settlement for less than she was entitled to.
Insurance contracts are sold by the insurance industry and purchased by members of the public for peace of mind. The more devastating the loss, the more the insured may be at the financial mercy of the insurer, and the more difficult it may be to challenge a wrongful refusal to pay the claim.
The jury decided a powerful message of denunciation, retribution and deterrence had to be sent to the respondent and they sent it.
The obligation of good faith dealing means that the appellant’s peace of mind should have been the respondent’s objective, and her vulnerability ought not to have been aggravated as a negotiating tactic.
An award of punitive damages in a contract case requires an “actionable wrong” in addition to the breach sued upon. Here, in addition to the contractual obligation to pay the claim, the respondent was under a distinct and separate obligation to deal with its policyholders in good faith. A breach of the contractual duty of good faith was thus independent of and in addition to the breach of contractual duty to pay the loss.
Punitive damages should only be imposed if:
there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour.
Compensatory damages are insufficient to accomplish the objectives of retribution, deterrence, and denunciation
Ratio: (1) Punitive damages are awarded when there is an actionable wrong in addition to the breach sued upon. (2) Insurers in an insurance contract have a distinct and separate obligation to deal with its policyholders in good faith, since it is a peace of mind contract. (3) Punitive damages should only be imposed if there has been a high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour and where Compensatory damages are insufficient to accomplish the objectives of retribution, deterrence, and denunciation (among other factors listed in case).
Branco v American Home Assurance Company 2013 SKQB 98 – CML
Punitive Damages
Facts: Action by the plaintiff, Branco, against the defendant insurers, AIG and Zurich Life Insurance for benefits related to a disabling workplace injury, aggravated damages for mental distress, and for punitive damages. In 1999, the plaintiff was injured in a workplace accident when a steel plate dropped on his foot. He was unable to continue working. AIG was advised of the injury, triggering a WCB-equivalent claim under the AIG policy. Even though the plaintiff's Portugal physician advised AIG that surgery was unsuccessful and that the plaintiff was permanently disabled, the plaintiff traveled to Saskatchewan in 2001 and 2002 at the request of AIG where he was examined by specialists and his disability was confirmed. Despite agreement that the plaintiff was entitled to an annual permanent functional impairment payment, independence allowance and a lifetime payment, AIG delayed payment of benefits, and even when the did, only made partial payment. Secondly, the plaintiff filed a disability claim with Zurich in 2003. Zurich did not accept the claim until 2009 despite medical reports of the plaintiff's disability and associated psychological consequences. In 2009, Zurich paid long term disability benefits, but continued to deny further coverage to the plaintiff's family. In the interim, the plaintiff was forced to borrow from family and refinance a family member's house to support themselves.
Issue: Should punitive damages be awarded in this case?
Held: Yes.
Reasoning:
AIG and Zurich breached their policies by failing to pay benefits to the plaintiff, and in so doing, breached duties of good faith and fair dealing.
The WCB-equivalent coverage provided by AIG and the long term disability insurance provided by Zurich were both peace of mind contracts, an object of which was to secure a psychological benefit.
AIG discontinued benefits for inappropriate and malicious reasons in order to create undue hardship on the plaintiff to force him into acceptance of an unreasonably low offer of settlement. Zurich's delay in paying benefits was egregious and completely reprehensible.
The mental distress caused by a breach of those contracts was within the reasonable expectation of the parties.
The conduct of the defendant insurers persisted over a lengthy period of time without rational justification, in the face of medical evidence establishing the plaintiff's disability, and with awareness of the hardship inflicted upon the plaintiff.
Their actions showed a pattern of abuse of an individual suffering from financial and emotional vulnerability. A deterrent award of punitive damages was required to discontinue exploitation of vulnerable insured persons.
Punitive damages were assessed against AIG in the amount of $1.5 million and against Zurich in the amount of $3 million.
Ratio: Punitive damages will be awarded to deter exploitation of vulnerable insured persons. This can be evidenced by the length of period the conduct persists over, the availability of evidence establishing the plaintiff’s claim, and the awareness of reasonable expectation by the insurers of the hardship inflicted upon the plaintiff.
Insurance Law – May 22
Subrogation
Insurerinsured3rd person wrongdoer
Insurer 3rd person wrongdoer
No subrogation in insurance of persons because the contract does not undertake to pay 3rd party actions or some unlooked for uncertain event (in principle).
Thus, in cases where death is caused by a third party, insurer does not have a recourse in subrogation
However, you could have conventional subrogation in life insurance permitting the insurer to go after the third party in the event that death is caused by the wrongful act of a third party
At CML, there are two conditions for subrogation (similar to CVL):
Existence of an enforceable right
Right that the insured might have
Subrogation requires (in its raw state – before statute intervention) requires that the insurer pays full indemnity
This has been modified by various statutory dispositions
In Ontario, subrogation is available earlier – as soon as any payment is made whatsoever
The insurance policy of the insured will generally include a clause that would also subsume all subcontractors in their insurance policy
There is the commercial practice of considering the insured and subcontractors as one unit (therefore no right of subrogation for insurer)
Who is included in the concept of ‘the insured’ is important and can be a limit to the right of subrogation in insurance
Commonwealth Construction v Imperial Oil [1978] 1 S.C.R. 317 - CML
Property Insurance – Right of Subrogation
Facts: A general contractor, Wellman-Lord, entered into a contract with Imperial Oil Ltd. and a subcontractor, Commonwealth, was charged with the installation of process piping. In the course of that installation a fire took place, which was admittedly the responsibility of Commonwealth. The total damage was covered under property insurance. The named insured included “Imperial Oil Limited and its subsidiary companies and any subsidiaries thereof and any of their contractors and subcontractors”. An action against Commonwealth claimed the cost thereof. The action had been brought by the insurers alleging subrogated rights obtained from the owner, Imperial, as well as the general contractor, Wellman-Lord. Commonwealth denied the possibility for the insurers to invoke subrogation.
Issue: Does Imperial Oil’s insurer’s have a right of subrogation in this case, and therefore a cause of action against Commonwealth?
Held: No.
Reasoning:
Starting point is that subrogation cannot be obtained against the insured himself.
In the case of true joint insurance the interests of the joint insured are so inseparably connected that the several insureds are to be considered as one with the obvious result that subrogation is impossible.
In the case of several insurance, if the different interests are pervasive and if each relates to the entire property, albeit from different angles, again there is no question that the several insureds must be regarded as one and that no subrogation is possible.
In the context of the construction contracts in this case, the various trades had, prior to the loss, such a relationship with the entire works that their potential liability therefor constituted an insurable interest in the whole.
Commonwealth was an insured whose insurable interest extended to the entire works prior to the loss so that, in accordance with the basic principles, the insurers had no right of subrogation.
Also, the principle that even if insurers have a subrogation right in a given case, they may renounce that right, was applicable here. Under the policy it was to the rights of the insured, i.e.,the entire group including Imperial, Wellman-Lord and Commonwealth, that the insurers were subrogated, not to the rights of some members of this group against another member of the same group.
Ratio: (1) If there are several parties to a contract and each party has an insurable interest in the whole of the subject matter of the insurance (property), the several insurers are going to be considered one and no subrogation will be possible. (2) An insurer cannot be subrogated to some members of the insured group against other members of the same group (cannot subrogate against a common insured).
Class Notes
insurer takes on the risk – including the risk of things connected with the principle insured
Somersall v Friedman [2002] 3 S.C.R. 109 - CML
Automobile Insurance – Subrogation
Facts: Two of the respondents suffered serious injuries in a motor vehicle collision and brought an action against the driver of the other vehicle, an underinsured motorist. The respondents later entered into a limits agreement with the tortfeasor, without notice to the appellant, their insurer. This agreement provided that (1) the tortfeasor would admit liability at trial and (2) the respondents would not sue him in excess of his liability coverage. The respondents sought to recover the remainder of their damages from appellant pursuant to their coverage known as the SEF 44 Endorsement which requires that an insured must be “legally entitled to recover” damages from the underinsured motorist in order to collect payment from the insurer.
Issue: Whether the limits agreement entered by respondents justify denial of claim by insurers.
Held: No.
Reasoning:
Majority:
The limits agreement, like a limitation period, does not block the action. It has no bearing on the right of the insured against the tortfeasor at the time of the accident, which is the relevant time for the determination of legal entitlement.
Furthermore, the respondents have not interfered with the appellant’s rights of subrogation to such an extent as to deprive it of a right it acquired in the contract.
Only a clear and unambiguous obligation upon the insured to maintain a claim in tort and not to waive it in exchange for a payment can support an interpretation favourable to the appellant.
Here, the appellant’s right of subrogation has not yet arisen (insurer’s right of subrogation will not arise until the insured has been fully indemnified), and in any event there is no evidence that the respondents did not honestly and in good faith believe that it was prudent and wise to enter into the limits agreement
Absent any evidence of actual or probable loss, the insurers should not be allowed to raise an alleged breach of subrogation rights in order to bar a claim made in good faith by the insured.
Dissent: The legal entitlement must be present when the claim is made. The respondents had no legal entitlement as of the date of their claim against the appellant. Furthermore, SEF 44 Endorsement explicitly makes subrogation part of the package accepted by both parties to the insurance contract. If the insured has prejudiced the subrogation rights of the insurer then it is open to the insurer to refuse the claim.
Ratio: (1) The legal entitlement available in cases of damages against an underinsured or uninsured motorist are assessed at the time of the accident. (2) A limits agreement, foregoing action to further pursue the tortfeasor for additional damages, does not bar recovery for the insured against his insurer for additional compensation (limiting an insurer’s rights in subrogation does not prejudice the insured to his claim against that insurer – insurer must show that he suffered actual damages)
Class Notes
we have a car accident. P+G injured in car accident. J caused the accident. P+G sued J. They settled the case with J, with something called “The Limits Agreement”.
Limit agreement had three terms:
J would admit liability
P+G would not claim anything from J or his insurer above J’s insurance limit of $200K
J’s insurer was going to pay P+G $50K in advance
Afterwards, P+G go after their own insurer for the difference between full amount of damage and the $200K. They had an Underinsured Motorist Endorsement in their contract (re: Vytlingham). #44 was their purchased insurance in case they suffered an accident or damages from a motorist who did not have sufficient insurance.
The clause said that it’ll cover whatever the insured is “legally entitled to recover from an inadequately insured motorist…”
This idea of legally entitled is problematic as it has a limiting effect
Insurer says we’re not going to pay you the difference because you are no longer legally entitled to recover from J because you settled
They further state that P+G have cut them off from recovering from J as well (you’ve cut me off of my right of subrogation since insurer dos not have more rights than insured!)
Question is at what point in time do we consider “legally entitled to recover”
Is that also the time at which the insurer becomes obliged to indemnify?
Courts look to decided cases of the limitation period: the parallel was where the injured party let the limitation lapse with respect to the wrongdoer
SCC says the right of subrogation wasn’t worth much anyways in this case since J is impecunious
So how do we solve this timing problem?
Court says it isn’t logical to only look at the point at which claim is made against insurer
The obligation crystalizes at the time the loss occurs
This is also when the legal entitlement to recover is born
Para. 30 important: “In my view, the answer must be that the insurer becomes obliged to make the payment the moment the claim of the insured against the tortfeasor comes into being, that is, at the time of the accident…the obligation of the insurer, therefore, comes into being at the same time as the obligation of the tortfeasor to pay damages.”
Back to the right of subrogation (Iacobucci):
It’s not worth much in this case
It’s optional
Premium covered the risk anyways w/o subrogation rights since they are unpredictable/random anyways
Courts state that absent actual / proven loss, you cannot refuse indemnification based on loss in right of subrogation
Case tells us two things:
Meaning of legally entitled to recover and when we assess that (at the time of accident – when legal entitlement is crystalized)
Debate between Iacobucci and Binnie about what is the nature of the right of subrogation
