Somersall v. Friedman

Somersall v. Friedman
Collection
Supreme Court Judgments
Date
2002-08-08
Neutral citation
2002 SCC 59
Report
[2002] 3 SCR 109
Case number
27851
Judges
McLachlin, Beverley; L'Heureux-Dubé, Claire; Gonthier, Charles Doherty; Iacobucci, Frank; Major, John C.; Binnie, William Ian Corneil; LeBel, Louis
On appeal from
Ontario
Subjects
Insurance
Notes
SCC Case Information: 27851
Decision Content
Somersall v. Friedman, [2002] 3 S.C.R. 109, 2002 SCC 59
Scottish & York Insurance Co. Ltd. Appellant
v.
Pearl Somersall, Gwendolyn Somersall and Janice Somersall Respondents
Indexed as: Somersall v. Friedman
Neutral citation: 2002 SCC 59.
File No.: 27851.
2002: January 21; 2002: August 8.
Present: McLachlin C.J. and L’Heureux‑Dubé, Gonthier, Iacobucci, Major, Binnie and LeBel JJ.
on appeal from the court of appeal for ontario
Insurance -- Automobile insurance -- Underinsured driver coverage -- Subrogation -- Limits agreement between insured and underinsured tortfeasor made without notice to insurer -- Agreement providing that tortfeasor would admit to fault at trial and that insured would not pursue damages beyond limits of tortfeasor’s insurance -- Insurer denying insurer’s claim for damages over and above tortfeasor’s coverage limit -- Whether limits agreement justifying denial of claim.
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 third respondent based her claim on s. 61 of Ontario’s Family Law Act. 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 the appellant pursuant to their underinsured driver 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. When the appellant cross-claimed against the underinsured motorist, he submitted in his defence that the respondents were bound by the limits agreement. The appellant then moved before trial for a determination of its liability on a question of law. The motions judge ruled that the limits agreement precluded the respondents from advancing a claim against the appellant pursuant to the SEF 44 Endorsement. The Court of Appeal, however, allowed the respondents’ appeal.
Held (Major and Binnie JJ. dissenting): The appeal should be dismissed.
Per McLachlin C.J. and L’Heureux-Dubé, Gonthier, Iacobucci and LeBel JJ.: 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. The promise by the respondents not to pursue the underinsured motorist beyond his policy limits has no bearing on any question of the legal entitlement that existed at the time of the accident. It only renders the respondents unable to further their legal rights against the tortfeasor in the courts. This rationale and result sit comfortably with both the policy purpose and the contractual nature of underinsured and uninsured motorist coverage. The respondents are precisely within the zone which SEF 44 coverage is designed to patch over within the Ontario system of mandatory insurance. The terms of the policy and public policy alike support their claim.
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. Further, it has long been the law, in the absence of contractual terms to the contrary, that the insurer’s right of subrogation will not arise until the insured has been fully indemnified. Here, the appellant’s right of subrogation has not yet arisen, 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. Moreover, the plain language of the contract does not support a finding that the limits agreement interfered with a contractual right of the appellant. The only clear obligation on the insured is to “cooperate with the insurer” (except in a pecuniary way) in the pursuit of the action, but this obligation only arises once a payment has been made, and no payment has yet been made here. If there is an ambiguity in the content of this obligation, the interpretive principle contra proferentem would demand that it be resolved in favour of the insured.
A finding that the limits agreement somehow interferes with the right of subrogation to such an extent as to nullify the right of the insured to indemnity would seriously undermine the position of the case law that the direct action against the insurer exists at all. Since subrogation rights against underinsured or uninsured drivers are rarely very valuable, it would be over-reaching to regard its loss as significantly changing the insurer’s position.
The minority’s position on s. 278(6) of the Insurance Act was agreed with. The provision cannot assist the insurer because it has neither made any payment nor assumed any liability therefor as required by s. 278(1).
Per Major and Binnie JJ. (dissenting): Ambiguities with respect to cover are to be resolved in favour of the insured. The language of the SEF 44 Endorsement, however, is not ambiguous and clearly requires that the insured refrain from acts destructive of the insurer’s subrogation interest. There must be a subsisting right of action against the tortfeasor at the time the claim is asserted against the insurer. It is not sufficient that it exists at the time of the accident. The expression “is legally entitled to recover” is framed in the present, not the past, tense. The respondents had no legal entitlement as of the date of their claim against the appellant.
Subrogation is a matter of substance, not form. The fact that the respondents signed a limits agreement rather than a release of the cause of action was of little importance for, in either case, the insurer is precluded from a successful claim over. The risk undertaken by the appellant was not the whole of the respondents’ loss but the loss reduced, at least potentially, by assigning the insurer all proper and available means of reimbursement. Although the right of subrogation cannot be exercised until payment is made, it is a contingent right that vests at the time the policy is entered into. For the Court now to add the requirement that an insurer denied subrogation must prove that the denial did in fact result in “actual and probable loss” ignores the wording of SEF 44 and introduces unnecessary uncertainty in its day-to-day application. The amount to which the insured is legally entitled is determined by the insurance contract, and the terms of the SEF 44 Endorsement explicitly make 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.
The appellant could not move to set aside the limits agreement under s. 278(6) of the Insurance Act because that provision is intended to protect the interests of an insurer who has paid or assumed liability for payment to the insured. It does not limit the ability to settle an action of a plaintiff who has not claimed (and may never claim) against the insurer. To allow an insurer who had no interest at the time to contest the validity of the limits agreement years after the settlement would contribute uncertainty to the settlement process and undermine the finality of litigation.
Cases Cited
By Iacobucci J.
Considered: Johnson v. Wunderlich (1986), 57 O.R. (2d) 600; Chambo v. Musseau (1993), 15 O.R. (3d) 305; DeLuca v. Motor Vehicle Accident Indemnification Corp., 215 N.E.2d 482 (1966); Wheeless v. St. Paul Fire and Marine Insurance Co., 181 S.E.2d 144 (1971); distinguished: Fogarty v. Co-operators Group Ltd., [1990] I.L.R. ¶ 1-2545; Nielsen v. Co-operators General Insurance Co. (1997), 209 A.R. 177; Kraeker Estate v. Insurance Corp. of British Columbia (1992), 93 D.L.R. (4th) 431; referred to: Burns v. Ferri (1994), 16 O.R. (3d) 569; Frenette v. Metropolitan Life Insurance Co., [1992] 1 S.C.R. 647; University of Saskatchewan v. Fireman’s Fund Insurance Co. of Canada (1997), 158 Sask. R. 223; State Farm Mutual Automobile Insurance Co. v. Griffin, 286 So.2d 302 (1973); Rhault v. Tsagarakos, 361 F.Supp. 202 (1973); Glover v. Tennessee Farmers Mutual Insurance Co., 468 S.W.2d 727 (1971); Conteh v. Allstate Insurance Co., 782 A.2d 748 (2001); Non-Marine Underwriters, Lloyd’s of London v. Scalera, [2000] 1 S.C.R. 551, 2000 SCC 24; Derksen v. 539938 Ontario Ltd., [2001] 3 S.C.R. 398, 2001 SCC 72; July v. Neal (1986), 57 O.R. (2d) 129; Castellain v. Preston (1883), 11 Q.B.D. 380; A.F.G. Insurances Ltd. v. City of Brighton (1972), 126 C.L.R. 655; Pacific Coyle Navigation Co. v. Ruby General Insurance Co. (1954), 12 W.W.R. (N.S.) 715; Ontario Health Insurance Plan v. United States Fidelity and Guaranty Co. (1989), 68 O.R. (2d) 190; Confederation Life Insurance Co. v. Causton (1989), 38 C.C.L.I. 1; Globe & Rutgers Fire Insurance Co. v. Truedell (1927), 60 O.L.R. 227; Commercial Union Assurance Co. v. Lister (1874), L.R. 9 Ch. App. 483; Beausoleil v. Canadian General Insurance Co. (1992), 8 O.R. (3d) 754; Puckett v. Liberty Mutual Insurance Co., 477 S.W.2d 811 (1971); Sahloff v. Western Casualty & Surety Co., 171 N.W.2d 914 (1969).
By Binnie J. (dissenting)
Guardian Assurance Co. v. Town of Chicoutimi (1915), 51 S.C.R. 562; Simpson v. Thomson (1877), 3 App. Cas. 279; Kraeker Estate v. Insurance Corp. of British Columbia (1992), 93 D.L.R. (4th) 431; Nielsen v. Co-operators General Insurance Co. (1997), 209 A.R. 177; Johnson v. Wunderlich (1986), 57 O.R. (2d) 600; Chambo v. Musseau (1993), 15 O.R. (3d) 305; July v. Neal (1986), 57 O.R. (2d) 129; Ledingham v. Ontario Hospital Services Commission, [1975] 1 S.C.R. 332; Glynn v. Scottish Union & National Insurance Co., [1963] 2 O.R. 705, rev’g [1963] 1 O.R. 599; John Edwards & Co. v. Motor Union Insurance Co., [1922] 2 K.B. 249; Hobbs v. Marlowe, [1978] A.C. 16; Colonial Furniture Co. (Ottawa) Ltd. v. Saul Tanner Realty Ltd. (2001), 52 O.R. (3d) 539; Napier v. Hunter, [1993] A.C. 713; Castellain v. Preston (1883), 11 Q.B.D. 380; Beausoleil v. Canadian General Insurance Co. (1992), 8 O.R. (3d) 754; Fogarty v. Co-operators Group Ltd., [1990] I.L.R. ¶ 1-2545; Khederlarian v. Safeco Insurance Co., Ont. Ct. (Gen. Div.), June 16, 1992; Birtles v. Dominion of Canada General Insurance Co. (1986), 46 Alta. L.R. (2d) 193; Barton v. Aitchison (1982), 39 O.R. (2d) 282; Re Pitts Insurance Co. (1982), 44 C.B.R. (N.S.) 133; Burns v. Ferri (1994), 16 O.R. (3d) 569, rev’g (1992), 8 O.R. (3d) 11; Transnational Insurance Co. v. Simmons, 507 P.2d 693 (1973); DeLuca v. Motor Vehicle Accident Indemnification Corp., 215 N.E.2d 482 (1966); Allstate Insurance Co. v. Skeeters, 846 F.2d 932 (1988); Biafore v. Bates-Pasis Leasing Inc. (1976), 11 O.R. (2d) 409; Toronto Hydro-Electric Commissioners v. Budget Car Rental Toronto Ltd. (1983), 43 O.R. (2d) 539.
Statutes and Regulations Cited
Family Law Act, 1986, S.O. 1986, c. 4, s. 61.
Insurance Act, R.S.O. 1990, c. I.8, s. 278(1), (6).
Insurance Act Regulations, R.R.O. 1980, Reg. 535, s. 4(1) [now R.R.O. 1990, Reg. 676].
Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 21.01.
Authors Cited
Birds’ Modern Insurance Law, 5th ed. by John Birds and Norma J. Hird. London, Sweet & Maxwell, 2001.
Brown, Craig. Insurance Law in Canada, vol. 1. Scarborough, Ont.: Carswell, 1999 (loose-leaf updated 2001, release 2).
Ivamy, E. R. Hardy. General Principles of Insurance Law, 6th ed. London: Butterworths, 1993.
Jerry, Robert H. Understanding Insurance Law, 2nd ed. New York: Matthew Bender, 1996.
MacGillivray on Insurance Law, 9th ed. by Nicholas Legh-Jones, general editor. London: Sweet and Maxwell, 1997.
Ytreberg, Dag E. “Insured’s Right to Bring Direct Action Against Insurer for Uninsured Motorist Benefits”, 73 A.L.R. 3d 632 (1976).
APPEAL from a judgment of the Ontario Court of Appeal (2000), 183 D.L.R. (4th) 396, 129 O.A.C. 68, 17 C.C.L.I. (3d) 1, 50 M.V.R. (3d) 148, [2000] O.J. No. 401 (QL), allowing an appeal from a judgment of the Ontario Court (General Division) (1998), 40 O.R. (3d) 461, 162 D.L.R. (4th) 229, 5 C.C.L.I. (3d) 309, 36 M.V.R. (3d) 153, [1998] I.L.R. ¶ I-3571, [1998] O.J. No. 2223 (QL). Appeal dismissed, Major and Binnie JJ. dissenting.
Brian J. E. Brock, Q.C., and Rita Bambers, for the appellant.
Jeffrey W. Strype, for the respondents.
The judgment of McLachlin C.J. and L’Heureux-Dubé, Gonthier, Iacobucci and LeBel JJ. was delivered by
Iacobucci J. –
I. Introduction
1 I have had the benefit of reading the succinct reasons of Justice Binnie. With respect, I differ with my colleague and would dismiss the appeal. Consequently, I prefer to set forth the background of the appeal prior to discussing my reasons for disagreement with my colleague.
2 The Somersalls were struck and injured by an underinsured motorist in 1989. They recovered as much of their damages as they could from that motorist’s insurer, and, aware that they had purchased additional coverage to protect them against just such an eventuality, sought the remainder from their own insurer. But their insurer did not wish to pay their claim. The insurer says that, by signing an agreement with the man whose negligence caused their injuries, they would not pursue him beyond his policy limits, and that the Somersalls have lost their claim and interfered with the insurer’s subrogation rights. To resolve this dispute, we must look to the rights and obligations the insurance contract between the parties sets out.
II. Background
3 The facts can be briefly stated. On January 29, 1989, the plaintiffs Pearl and Gwendolyn Somersall (“respondents”) were injured in a car accident with the defendant Jerry Friedman. The respondents filed the statement of claim in their action on January 28, 1991. On December 13, 1991, an agreement was entered into between the respondents and the defendant Friedman, which the parties have referred to as the “Limits Agreement”. The Limits Agreement provided that (a) Friedman was to admit liability for the accident at trial; (b) the respondents would not claim against Friedman or his insurer in excess of Friedman’s policy limit of $200,000; and (c) Friedman’s insurer was to make an advance payment of $50,000 to the respondents.
4 The co-defendant, and now appellant, was the respondents’ insurer, Scottish & York Insurance Co. Ltd. (“Scottish & York”), and was joined to this action in July 1994. The respondents sought to recover the remainder of their damages from Scottish & York pursuant to their underinsured driver coverage. This coverage existed pursuant to the Family Protection Endorsement, an optional but very common endorsement in an Ontario automobile insurance agreement, also known as the “SEF 44 Endorsement”. According to this provision, a plaintiff must be “legally entitled to recover” damages from an underinsured motorist in order to access their own insurer’s pool of coverage for such circumstances. Specifically, it obliges the insurer to:
. . . indemnify each eligible claimant for the amount that such eligible claimant is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of bodily injury or death sustained by an insured person by accident arising out of the use or operation of an automobile.
5 The SEF 44 Endorsement is the product of Ontario’s statutory automobile insurance scheme, and the language “legally entitled to recover” is a standard phrase also in use under similar standard endorsements in most Canadian jurisdictions. It is important to note that the Ontario scheme is now quite different from the scheme by which this action is governed. The scheme governing the claim in this appeal was primarily tort-based, while the current regime generally involves first-party recovery from the insurer of the injured party, tort damages being relegated to instances of “catastrophic loss”.
6 Scottish & York cross-claimed against Friedman. Friedman submitted in his Amended Statement of Defence to this cross-claim that the Limits Agreement bound the respondents. The appellant moved, pursuant to Rule 21.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, for determination before trial of the following question of law:
Does the agreement reached between counsel for the plaintiffs and counsel for the defendant Friedman limiting the plaintiffs’ claim to that defendant’s policy limits preclude the plaintiffs from advancing a claim against Scottish & York pursuant to the underinsured motorist provisions of its policy?
Spiegel J. ruled that the Limits Agreement did preclude the plaintiffs’ claim against Scottish & York: (1998), 40 O.R. (3d) 461. The Ontario Court of Appeal allowed an appeal by the Somersalls and found that the Limits Agreement did not have that effect: (2000), 183 D.L.R. (4th) 396. Scottish & York now appeals to this Court.
III. Relevant Contractual and Statutory Provisions
7 SEF 44 Family Protection Endorsement
2. INSURING AGREEMENT
In consideration of the premium charged and subject to the provisions hereof, it is understood and agreed that the Insurer shall indemnify each eligible claimant for the amount that such eligible claimant is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of bodily injury or death sustained by an insured person by accident arising out of the use or operation of an automobile.
3. LIMIT[ATION] OF COVERAGE UNDER THIS ENDORSEMENT
(a) The Insurer’s maximum liability under this endorsement, regardless of the number of eligible claimants, or number of insured persons injured or killed, or number of automobiles insured under the policy shall be the amount by which the Limit of Family Protection Coverage exceeds the total of all limits of motor vehicle liability insurance, or bonds, or cash deposits, or other financial guarantees as required by law in lieu of such insurance, of the inadequately insured motorist and of any person jointly liable therewith;
(b) Where this endorsement applies as excess, the Insurer’s maximum liability under this endorsement is the amount determined in accordance with paragraph 3(a) less the amounts available to eligible claimants under any first loss insurance as referred to in paragraph 7 of this endorsement.
4. AMOUNT PAYABLE PER ELIGIBLE CLAIMANT
(a) The amount payable under this endorsement to any eligible claimant shall be ascertained by determining the amount of damages the eligible claimant is legally entitled to recover from the inadequately insured motorist and deducting from that amount the aggregate of the amounts referred to in paragraph 4(b), but in no event shall the Insurer be obligated to pay any amount in excess of the limit of coverage as determined under paragraph 3 of this endorsement.
(b) The amount payable under this endorsement to any eligible claimant is excess to any amount actually recovered by the eligible claimant from any source (other than money payable on death under a policy of insurance) and is excess to any amounts the eligible claimant is entitled to recover (whether such entitlement is pursued or not) from:
(i) the insurers of the inadequately insured motorist, and from bonds, cash deposits or other financial guarantees given on behalf of the inadequately insured motorist;
(ii) the insurers of any person jointly liable with the inadequately insured motorist for the damages sustained by an insured person;
(iii) the Régie de l’assurance automobile du Québec;
(iv) an unsatisfied judgment fund or similar plan or which would have been payable by such fund or plan had this endorsement not been in effect;
(v) the uninsured motorist coverage of a motor vehicle liability policy;
(vi) any automobile accident benefits plan applicable in the jurisdiction in which the accident occurred;
(vii) any policy of insurance providing disability benefits or loss of income benefits or medical expense or rehabilitation benefits;
(viii) any Worker’s Compensation Act or similar law of the jurisdiction applicable to the injury or death sustained;
(ix) any Family Protection Coverage of a motor vehicle liability policy.
. . .
5. DETERMINATION OF THE AMOUNT AN ELIGIBLE CLAIMANT IS LEGALLY ENTITLED TO RECOVER
(a) The amount that an eligible claimant is legally entitled to recover shall be determined in accordance with the procedures set forth for determination of the issues of quantum and liability by the uninsured motorist coverage provisions of the policy.
(b) In determining the amount an eligible claimant is legally entitled to recover from the inadequately insured motorist, issues of quantum shall be decided in accordance with the law of the province governing the policy and issues of liability shall be decided in accordance with the law of the place where the accident occurred.
(c) In determining any amounts an eligible claimant is legally entitled to recover, no amount shall be included with respect to pre-judgment interest accumulating prior to notice as required by this endorsement.
. . .
6. PROCEDURES
(a) The following requirements are conditions precedent to the liability of the Insurer to the eligible claimant under this endorsement:
(i) the eligible claimant shall promptly give written notice, with all available particulars, of any accident involving injury or death to an insured person and of any claim made on account of the accident,
(ii) the eligible claimant shall, if so required, provide details of any policies of insurance, other than life insurance, to which the eligible claimant may have recourse,
(iii) the eligible claimant and the insured person shall submit to examination under oath, and shall produce for examination at such reasonable place and time as is designated by the Insurer or its representative, all documents in their possession or control that relate to the matters in question, and they shall permit extracts and copies thereof to be made.
(b) Where an eligible claimant commences a legal action for damages for bodily injury or death against any other person owning or operating an automobile involved in the accident, a copy of the Writ of Summons or other initiating process shall be delivered or sent by registered mail immediately to the chief agency or head office of the Insurer in the province together with particulars of the insurance and loss.
(c) Every action or proceeding against the Insurer for recovery under this endorsement shall be commenced within 12 months from the date upon which the eligible claimant or his legal representative knew or ought to have known that the quantum of the claims with respect to an insured person exceeded the minimum limits for motor vehicle liability insurance in the jurisdiction in which the accident occurred. No action which is commenced within 2 years of the date of the accident shall be barred by this provision.
. . .
9. SUBROGATION
Where a claim is made under this endorsement, the Insurer is subrogated to the rights of the eligible claimant by whom a claim is made, and may maintain an action in the name of that person against the inadequately insured motorist and the persons referred to in paragraph 4(b).
10. ASSIGNMENT OF RIGHTS OF ACTION
Where a payment is made under this endorsement, the Insurer is entitled to receive from the eligible claimant, in consideration thereof, an assignment of all rights of action whether judgment is obtained or not, and the eligible claimant undertakes to cooperate with the Insurer, except in a pecuniary way, in the pursuit of any subrogated action or any right of action so assigned.
Insurance Act Regulations, R.R.O. 1980, Reg. 535
DETERMINATION OF LEGAL LIABILITY AND AMOUNT OF DAMAGES
4. -- (1) The determination as to whether the person insured under the contract is legally entitled to recover damages and, if so entitled, the amount thereof shall be determined,
(a) by agreement between the person insured under the contract and the insurer;
(b) at the request of the person insured under the contract, and with the consent of the insurer, by arbitration by some person to be chosen by both parties, or if they cannot agree on one person, then by two persons, one to be chosen by the person insured under the contract and the other by the insurer and a third person to be appointed by the persons so chosen; or
(c) by a court of competent jurisdiction in Ontario in an action brought against the insurer by the person insured under the contract, and unless the determination has been previously made in a contested action by a court of competent jurisdiction in Ontario, the insurer may include in its defence the determination of liability and the amount thereof.
Insurance Act, R.S.O. 1990, c. I.8
278. – (1) An insurer who makes any payment or assumes liability therefor 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.
. . .
(6) A settlement or release given before or after an action is brought does not bar the rights of the insured or the insurer, as the case may be, unless they have concurred therein.
IV. Issue
8 Does the Limits Agreement entered into between the respondents and the defendant Friedman preclude the claim of the respondents for compensation under the SEF 44 Endorsement against the appellant insurer?
V. Judgments Below
A. Ontario Court (General Division) (1998), 40 O.R. (3d) 461
9 Spiegel J. reviewed the Ontario Court of Appeal’s decisions in Johnson v. Wunderlich (1986), 57 O.R. (2d) 600, and Chambo v. Musseau (1993), 15 O.R. (3d) 305. He found that they established that an insured could directly sue the SEF 44 carrier rather than having to obtain judgment against the tortfeasor in order to collect payment from the carrier under the SEF 44 Endorsement. This direct action could be brought even if the limitation period governing the action against the tortfeasor had expired. Spiegel J. distinguished actions brought despite the statutory prescription of the action against the tortfeasor from the present circumstances. Examining the case of Burns v. Ferri (1994), 16 O.R. (3d) 569 (C.A.), Spiegel J. found that an agreement between the insured and the tortfeasor purporting to release the tortfeasor from liability further than the agreed upon payment would render the insured no longer “legally entitled to recover”, and thus without remedy against the insurer. The agreement in Burns did not release the tortfeasor from liability above that which was settled by agreement. Therefore, unlike in the case of the present Limits Agreement, the insured was still at all times “legally entitled to recover” damages over and above the settlement.
10 Thus, Spiegel J. concluded that the Limits Agreement rendered the plaintiffs no longer “legally entitled to recover” damages beyond those already recovered pursuant to that agreement. The stated question was answered in the affirmative and the action against the insurer was therefore dismissed.
B. Ontario Court of Appeal (2000), 183 D.L.R. (4th) 396
11 Charron J.A., for a unanimous panel, held that the question before Spiegel J., though novel, was governed by existing jurisprudence and that the motions judge was bound to answer it in the negative. He was in error in distinguishing the authorities.
12 There was no principled reason to distinguish the interference with a legal right of action caused by a limitation period from that caused by the Limits Agreement. The principle in Johnson, repeated in Chambo, was that only fault and the quantum of damages were required to be proved by the insured in a direct action against the insurer. It was only necessary for the plaintiffs to show that Friedman was at fault in the accident, and that the damages caused by his fault exceeded his policy limits. The essence of Johnson and Chambo was that the direct right of action against the insurer did not require a prior judicial determination of liability.
13 Charron J.A. found that even if the Limits Agreement interfered with the subrogation rights of the insurer, the insurer’s position would not be advanced, since the operation of a limitation period would have the same effect. Furthermore, although the issue was unnecessary to decide in light of the fact that Friedman was not party to the present appeal, s. 278(6) of the Insurance Act appeared to preserve the rights of the insurer in this case against him.
14 Finally, Charron J.A. distinguished the cases from Alberta that reached the opposite result in interpreting the underinsured motorist endorsement. By contrast to the Ontario regulation governing the point, the Alberta provision considered in Fogarty v. Co-operators Group Ltd., [1990] I.L.R. ¶ 1-2545 (Alta. Q.B.), and in Nielsen v. Co-operators General Insurance Co. (1997), 209 A.R. 177 (C.A.), did not allow determination of liability and quantum of damages by a court of competent jurisdiction, but only by resort to arbitration, failing agreement between the insured and the insurer.
15 Therefore, the appeal was allowed and the stated question answered in the negative.
VI. Analysis
A. Introduction: the SEF 44 Endorsement
16 The purpose of liability insurance generally is to spread risk among those who, as policyholders, pay premiums for this coverage. Risk was defined by L’Heureux-Dubé J., adopting the language of Malouf J.A., in Frenette v. Metropolitan Life Insurance Co., [1992] 1 S.C.R. 647, at p. 668, as [translation] “a future event, certain or uncertain, which may occasion loss”. In University of Saskatchewan v. Fireman’s Fund Insurance Co. of Canada (1997), 158 Sask. R. 223 (C.A.), Sherstobitoff J.A., at paras. 33-34, defined risk as “the peril insured against”, or “the hazard or chance of misfortune or loss at some time in the future”. He noted that “[i]f the misfortune or loss has already occurred, it is no longer a risk, but a certainty.” Thus, the insurer crafts a policy which provides the policyholders with protection against a specified risk or future peril in return for the periodic payment of a premium. To provide this protection, the insurer undertakes to be prepared to pay out to the insured up to the maximum quantum of loss that could be suffered were the risk to occur, usually set at some cap.
17 The specific purpose of the SEF 44 Endorsement is to provide coverage, in exchange for a premium paid by the insured, for injuries sustained by the insured and eligible other occupants of the vehicle, in motor vehicle accidents caused by motorists who are not insured or whose liability limits are insufficient to compensate the injuries suffered by the claimants. Although the form of the SEF 44 is standardized, it is an optional coverage for which the premium paid is in addition to the premium paid for the coverage purchased under the standard automobile policy.
18 The essence of this endorsement is that the insured protects himself, by making the extra payment, from the risk of being injured by an inadequately insured motorist. The insured pays a fee to the insurer to make direct compensation in the event that such an accident occurs. Since motor vehicle insurance is mandatory for all drivers in Ontario, and was at the time of the accident at issue here, this risk is, relatively speaking, small. It has been reduced further since the introduction of the generally first-party compensation system of automobile insurance in Ontario. Since the apportionment of fault is now, in most cases, a matter to be determined between the involved insurance companies, the class of inadequately insured drivers has been reduced, so far as the insured person is concerned, to those drivers who do not carry insurance at all.
19 The clause that is most central to the present dispute is clause 2 of the SEF 44, which sets out the general conditions of the agreement. Clause 2 reads:
In consideration of the premium charged and subject to the provisions hereof, it is understood and agreed that the Insurer shall indemnify each eligible claimant for the amount that such eligible claimant is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of bodily injury or death sustained by an insured person by accident arising out of the use or operation of an automobile. [Emphasis added.]
The scope and meaning of this phrase, “legally entitled to recover”, is the first and most important issue in this appeal.
20 The appellant has argued, in addition, that the interference by the respondents with the insurer’s right to be subrogated to the respondents’ claim against Friedman immunizes the appellant from the present action. These rights are set out in clauses 9 and 10 of the SEF 44. I will consider each of these two aspects of the case in turn.
B. The Meaning of “Legally Entitled to Recover”
21 The SEF 44 uses the phrase “legally entitled to recover” in setting out the requirements an insured must meet to collect under the endorsement. Specifically, it provides that the insured must be legally entitled to recover damages from the inadequately insured motorist with whom the accident has occurred.
(a) The Previous Case Law in Ontario
22 The Ontario Court of Appeal has considered the meaning of this section before and found, as Spiegel J. noted, that the statutory prescription of the underlying action against the tortfeasor will not defeat the legal entitlement of the insured to damages within the meaning of the SEF 44. In Johnson, supra, the defendant insurer was joined to an action against the defendant tortfeasor four days after the expiry of the limitation period against the tortfeasor. Morden J.A., for a majority of the court, held that the action against the insurer was a distinct action sounding in contract, and that the limitation period for such a direct action did not begin to run until the plaintiff knew or ought to have known the material facts of the cause of action against the insurer, i.e., that the tortfeasor was inadequately insured. In distinguishing the cause of action against the tortfeasor from the cause of action against the insurer, Morden J.A. considered the meaning of the words “legally entitled to recover”. He found at p. 609 that
[t]he words “legally entitled to recover” do not import a requirement that this issue must have received a prior judicial determination but, rather, simply that the person insured must establish that the uninsured or unidentified owner or driver is at fault and the amount of the damages. . . .
23 The Ontario Court of Appeal again considered the phrase, and the conclusion of Morden J.A., in Chambo, supra. In Chambo, an action was brought by the insurer against the uninsured tortfeasor within the limitation period. A second action was then brought by the insured against the insurer and the tortfeasor together four days after the limitation had expired against the tortfeasor. The insurer asserted, in defence of the latter action, the same position that was rejected in Johnson, namely, that failure to timely pursue the tortfeasor resulted in the insured no longer being “legally entitled to recover” damages, and thus without remedy against the insurer as well. Osborne J.A. said (at p. 312):
It seems to me that in Johnson v. Wunderlich, Morden J.A. stated in unambiguous terms that in a direct action against the insurer, the words “legally entitled to recover damages”, in the context of the uninsured motorist coverage, require the insured person to establish only that the uninsured motorist is at fault and the amount of the insured person’s damages.
Since the limitation period against the insurer directly had not expired, the action was permitted to proceed. The fact that the tortfeasor could not be pursued directly by the plaintiff owing to the operation of limitation periods was irrelevant to the availability of the direct action against the insurer.
24 I do not agree with my colleague Binnie J.’s view that Chambo constituted a “considerable and unjustified extension” (para. 128) of Johnson. Morden J.A. was very clear in Johnson that there might be situations in which the subrogated claim was lost, as I discuss below. While he expressed concern about this possibility, he concluded -- rightly, in my view -- that the contract required this and that it was not his place to rewrite it. The reduction of the insured’s obligation to a mere showing that she was “legally entitled to recover”, and the availability of the direct action under s. 4(1)(c) of Regulation 535, by design, result in a truncation of the process of proving a claim against the tortfeasor. There would be no practical purpose in having a direct action at all, otherwise, because an actual judicial determination of fault and damages and a corresponding award would then be the de facto requirement for recovery. Chambo, like Johnson, simply recognizes the trade-offs inherent in the relationship created by the SEF 44.
25 In short, the law in Ontario is already clear to the extent that limitation periods are the barrier standing in the insured’s way of actually exercising a legal right to recover from the tortfeasor, but are not a barrier that prevents the insured from exercising a legal right against his or her insurer under an endorsement such as SEF 44. The novel question here is whether we should regard agreements of the type entered into in this case as barring the insured from recovery from the insurer. The parties have stipulated that the agreement in this case is not of the same type as in Burns, supra. That is, whereas in Burns the insured was found only to have released the tortfeasor from any action to collect the portion of damages he had already paid out by agreement, in this case we must suppose that the Limits Agreement commits the insured to refrain from any further legal action arising from this accident against the tortfeasor.
(b) The Relevant Time of the Inquiry
26 The interpretation put on the words, “legally entitled to recover”, by the Ontario Court of Appeal appears to suggest that, because only fault and damages need be proven, the phrase only encompasses substantive tort law. On this approach, limitation periods and potentially the Limits Agreement, are excluded simply because the phrase intends to refer only to the substantive law of tort, not procedural laws, waivers, and whatever other specific rules, laws or contracts interfere with the actual pursuit of the tortfeasor. However, this view is seemingly incompatible with comments such as those of Charron J.A. in the present case, which indicate that “all applicable laws” govern the plaintiff’s legal entitlement to recover damages under the SEF 44.
27 In my view, these comments get to the underlying truth of the matter. The real question is not which laws are applicable, as a matter of principle, in the determination of legal entitlement to recover damages. All laws in force that are relevant to the legal entitlement must be considered in order to determine whether the entitlement exists. The question is, rather, to what point in