"When can you recover funds paid to an insured?"
June 2005When can you recover funds paid to an insured?
by Michael Thomas - June 2005
The basis of an insurer’s right to bring a subrogated action is that they have made payment to their insured for a claim under a policy of insurance. This article will demonstrate that things may not be as simple as they seem, and that an insurer should ensure that payment has actually been made pursuant to the policy of insurance in order to guarantee his or her ability to recover the funds.
I have used the word claim as shorthand for legal obligation. If an insurer makes a payment that they are not legally obligated to pay, no right of subrogation exists. For example, in Society of Notaries of British Columbia v. Dowson [1995] B.C.J. 401 (BCSC) a notary public absconded with his client’s money. Some of the clients were reimbursed by the Society of Notaries of British Columbia. Section 17 of the Notaries Act, provided for a special fund that entitled the Society to make discretionary payments. The Society sought to claim the amount of the payments made from the fund from the auditor. The court determined that since the Society made the payments voluntarily without a legal obligation they were not entitled to bring a subrogated action to recover the funds.
A similar issue can arise when an insurer pays funds to an insured to resolve a disputed claim for payment of insurance benefits. Care must be taken to ensure that the insurer maintains a right to subrogation. This is illustrated by the case of Wellington Insurance Co. v. Armac Diving Services Ltd. (1987) 34 D.L.R. 4th 62 (BCCA). Armac Diving Services owned a boat which was insured by Wellington Insurance. The boat was damaged when it capsized. Wellington denied that the loss was covered by the policy, and Armac Diving commenced an action for a declaration of entitlement to benefits under their insurance policy. Wellington settled the claim by paying half of the amount owed to Armac Diving pursuant to a settlement agreement. The basis for the settlement was not that payment was being made pursuant to the policy, but rather to bring an early end to legal proceedings and as a public relations gesture. Later, Armac Diving recovered judgment for its loss against a third party.
Was Wellington entitled to subrogate the amount paid to Armac Diving? The answer from the Court of Appeal was no. The Court of Appeal ruled that no payment had been made to the insured for the loss sustained under the policy and that the insurer was therefore not entitled to be compensated for the loss recovered by the insured from the third party. Why is this? In this situation, an insurer’s subrogation rights, if they exist, arise from section 80(2) of the Insurance (Marine) Act, which states:
… where the insurer pays for a partial loss … he is subrogated to all rights and remedies of the assured in and in respect of the subject matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by the payment for the loss.
The court noted that section 80(2) must be interpreted against the background of the common law principles governing the right of subrogation. The Court noted that the purpose of section 80(2) is not to alter the long standing principles of subrogation, but rather to extend them to partial losses where the doctrine of subrogation did not apply at common law. Therefore, in interpreting the section the Court determined that it must first answer the question: what is the nature of payment by an insurer to an insured that gives rise to a right of subrogation at common law? The short answer is that at common law an insurer’s right to subrogate is created by the payment of the insurer to the insured for his loss.
In applying these principles the Court noted that the payment by Wellington could not be said to have been made with the intention of reducing the loss claimed by Armac Diving under the insurance policy. Wellington unequivocally denied any liability to pay the loss. Payment was not made in partial satisfaction of the loss, but was made in consideration for a complete abandonment of Armac Diving claim under the policy. Hence, as no payment had been made to the insured for the loss sustained under the policy, the insurer was not entitled to subrogate.
In determining whether money has been paid pursuant to a policy of insurance the Courts will look at the context in which payment was made to an insured. For example in Chubb Insurance Co. of Canada v. Cast Line ltd. [2001] Q.J. No. 2363 (QSC) Gomery J., provided an example of the importance of interpreting the context in which payment is made. Cast Line was responsible for delivering seven large containers of Cheddar Cheese. Unfortunately delivery was delayed resulting in a loss in value of the cheese of over $50,000. Chubb Insurance provided payment of the loss to their insured, who signed a receipt calling the sum "a loan". Chubb then commenced an action against Cast Line to recover the funds paid to their insured. Gomery J. affirmed the principle that an insurer must be able to establish that it paid an indemnity to its insured in order to be entitled to subrogate for payment to their insured. Gomery J. noted that despite the use of the word "loan", the full meaning of the receipt and the contractual arrangement between Chubb and Cast Line was that the payment was an insurance indemnity. The court determined that this provided sufficient interest to entitle Chubb to sue Cast Line for the amount it had paid to its insured.
The above cases, Wellington Insurance Co. v. Armac Diving Services Ltd. and Chubb Insurance Co. of Canada v. Cast Line ltd. dealt with situations in which an insurer was unwilling to recognize coverage under their insurance policy. One should be wary of recognizing coverage simply to preserve a right of subrogation when one resolves a disputed claim. In Ultamar Ltd. v. Rancur Petroleum Services Ltd. [2005] N.J. No. 98 (NLTD) Lombard General Insurance Company paid a minor claim for damages to Crosbie Industrial Services Ltd pursuant to their policy of insurance. Crosbie was subsequently named in a large lawsuit when a fuel storage tank that it was cleaning exploded. Lombard denied coverage for the claim pursuant to an exclusion clause contained in their insurance policy. The court ruled that Lombard could not rely upon the exclusion clause because they had provided payment to Crosbie for an earlier claim that would have been caught by this same exclusion clause. Lombard cannot deny coverage under an exclusion clause in one instance will allowing coverage in another. Insurers should be careful when providing coverage in a disputed claim solely for subrogation purposes.
Finally, it is important to recognize that most insurance contracts contain extensive subrogation provisions. Any analysis of what payment is sufficient to trigger a right of subrogation must begin with a review of the provisions contained in the insurance policy.
