Direct Actions Against Insurers
In litigation, it is often liability insurers that “hold the purse strings”, so to speak. When faced with a difficult or impecunious defendant, plaintiffs have tried to involve the defendant’s insurer in the litigation, or have even tried to side-step the insured defendant entirely and solely pursue the insurer as defendant.
Such proceedings are referred to as “direct actions” against the insurer. In the United States, courts in many jurisdictions have allowed joinder of the tortfeasor and its insurance company under two conditions:
- when the tortfeasor is a common carrier, which is required by the legislature or a city ordinance to carry liability insurance for the benefit of the public; and
- by express statutory provision.
In Ontario, there are two legislated circumstances where the insurer may be involved in litigation either along with the insured, or in its stead:
- If a judgment obtained against the insured cannot be satisfied. Section 132 (1) of the Insurance Act provides that:
- (1) Where a person incurs a liability for injury or damage to the person or property of another, and is insured against such liability, and fails to satisfy a judgment awarding damages against the person in respect of the person’s liability, and an execution against the person in respect thereof is returned unsatisfied, the person entitled to the damages may recover by action against the insurer the amount of the judgment up to the face value of the policy, but subject to the same equities as the insurer would have if the judgment had been satisfied.
- If a claimant is involved in an automobile accident, up to a limit of $200,000.00. S. 258 (14) of the Insurance Act provides that:
- (14) Where an insurer denies liability under a contract evidenced by a motor vehicle liability policy, it shall, upon application to the court, be made a third party in any action to which the insured is a party and in which a claim is made against the insured by any party to the action in which it is or might be asserted that indemnity is provided by the contract, whether or not the insured enters an appearance or defence in the action.
There is a dearth of cases dealing with the rights of a plaintiff against a defendant’s insurer. That said, a review of the available case law can give one some guidance as to the courts’ general attitude towards direct actions against insurers, which is one that view such actions narrowly and as an assignee of the insured’s benefit to the insurance policy.
In Frederick et al. v. Aviation & General Insurance Co. Ltd., the plaintiff sought to satisfy a judgment as against the bankrupt insured from its insurer. The insurer denied liability to the plaintiffs, claiming that the insured had breached material terms in the policy. The defendant insurer moved to add the insured to the action.
In its decision, the Ontario Court of Appeal opined that the plaintiffs were prosecuting the claim not only for their own benefit, but also for the benefit of the insured, as the insured would be relieved of its obligations under the judgment should the plaintiffs be successful. The proceeding, the Court observed, was akin to an action being brought by an assignee of the insured, in that the plaintiff, as the assignee, had the same rights as the insured, and could not claim more than what the insured was entitled to. Rather than duplicating the proceedings and having the insured pursue the insurer for indemnity in a separate action, the Court of Appeal allowed the insured to be added to the action so the issue of breach of policy could be dealt with in the same action.
In Freemont Development Co v Travellers Indemnity Co.  B.C.J. No. 1700 (Sup Ct), the plaintiff tried to enforce a judgment against the defendant’s insurer. However, B.C. legislation did not allow claimants to go after insurers to satisfy outstanding judgments for pure economic loss. The plaintiff argued that policies of insurance are for the benefit of the victims, and that this intention is sufficient to create a trust, permitting the victims to maintain a direct action as against the insurer. The court held that while most liability policies can be said to be created for the benefit of a third party, the doctrine of privity of contract prevails. The simple intention that a policy benefit a third party victim is not enough to create a trust relationship between the insurer and the victim.
In Perry v General Security Insurance Co of Canada (1984), 47 OR (2d) 472, the plaintiffs obtained a default judgment as against the negligent solicitor and brought a claim as against the solicitor’s insurer. While the insurer could not be added as a party to the action against the negligent solicitor, it was kept apprised of the proceedings. During the litigation, the solicitor failed to cooperate with the defence, leading to a default judgment.
The Ontario Court of Appeal (with Houlden J.A. dissenting) held that “property” as defined in section 132(1) of the Insurance Act cannot be taken to mean economic loss unrelated to physical damage to property. The Court further found that it would be prejudicial to the insurer to pay out the default judgment as the quantum would have considerably been less had the solicitor cooperated with the defence.
The Court of Appeal was unhappy in Perry that the victims could not retain compensation due to legislative language and the solicitor’s noncooperation – “it seems that the more negligent the solicitor is in carrying out his obligations to the insurer under the insurance contract… the less possibility there is for the client to recover moneys payable under the insurance contract” (para 32).
The Court suggested that legislature amend the Insurance Act to include a provision allowing third parties to claim against insurers regardless of the acts or defaults of the insured, subject to certain limits, as it did for motor vehicle accidents, stating, “the situation revealed by this claim cannot be unique, and it is to be hoped that a prompt solution is provided by legislation or otherwise” (para 34).
While similar direct actions against insurers have been attempted by plaintiffs, the law remains unchanged since the days of Perry – plaintiffs are considered to be at most assignees of the insured, but not beneficiaries of the insurance policy. Insurers should be aware that when they are added as a defendant to a claim, the plaintiffs can only access the insurer through the insured defendant, and the plaintiffs’ entitlement is limited by the conduct of the insured.
This blog entry has been placed on our website to inform readers in a general way of the authors’ view of the law at the time of its presentation. It is not intended as legal advice and no reliance may be placed on its contents. Some principles of law or procedure may have changed and may no longer be applicable since its publication. The authors and our firm disclaim any liability arising from reliance on any part of this blog entry.