Subrogation: When Insurers and Insureds Collide

The concept of subrogation has existed for hundreds of years as an equitable remedy available to an insurer seeking to recover the claim payment made to an insured.[1] It is now integrated into Canadian insurance legislation as a right given to an insurer.[2] It allows the insurer to bring an action against another party in the name of the insured in specific circumstances following a claim payment to the insured.

It is obvious to say an insurer is prohibited from seeking subrogation from its own insured. However, before we dismiss all possibility of subrogating against an insured, we must consider the cases discussing subrogation in Canadian courts. Examining these cases closely shows that this prohibition on subrogation is not applied as a full stop to litigation as effortlessly as one might expect. Instead, the courts consistently and thoroughly consider the policy language, relevant contracts and applicable statutes to determine when subrogation is permitted on a case-by-case basis. Although the outcome is almost always that the insurer is prohibited from seeking subrogation against its insured, the specific analysis to arrive at that conclusion matters.

This article explores the essential components of subrogation, starting with its fundamental principles and progressing to real-world case studies illustrating court decisions where subrogation rights were permitted or denied. A clear understanding of subrogation rights and exceptions is vital for ensuring adequate coverage for all parties and minimizing unexpected challenges down the line.

Basic Principles of Subrogation

There are two Supreme Court of Canada decisions that are relied upon as authorities for the doctrine of subrogation. Although Commonwealth Construction Company Limited v Imperial Oil Limited[3] has stood for the principle that an insurer cannot subrogate against its insured, the Court reached this decision through an analysis of the principle of bailment. The bailment concept was applied to determine whether an insurable interest in the subject building existed for Commonwealth Construction, a subcontractor, outside a traditional property ownership structure.[4] In its decision, the Court held that Commonwealth Construction had an insurable interest in the entire project, not just its own work, because all trades working on a project were working towards one common goal.[5] Commonwealth Construction’s insurable interest in the whole building made it an insured under the policy. Once this insurable interest was established, the Court found that the insurer could not subrogate against Commonwealth Construction.[6]

The Supreme Court of Canada also considered the doctrine of subrogation in Fraser River Pile & Dredge Ltd. v Can-Dive Services Ltd.[7] In this decision, the Court held that it was appropriate to relax the doctrine of privity of contract to allow the subrogation clause to operate for the benefit of a third party. The insurer and insured entered into the insurance contract that expressly extended a subrogation waiver to an ascertainable class of third-party beneficiaries. Even though these third parties were not parties to the insurance contract, they were to receive this benefit unless a limit to the benefit was clearly expressed in the insurance policy.

Example of Court’s Analysis

The more recent case that is often referred to in subrogation matters is Condominium Corp. No. 9813678 v Statesman Corp.[8] This decision sets out the law on subrogation as follows:

The law is well settled that the insurer has no subrogation rights against an insured. In other words, it cannot sue any of its insured for losses paid out under the same policy, no matter how negligent they were in causing the loss (barring arson or other deliberate cause).[9]

After clearly setting out the law on subrogation in this decision, the Court undertook an analysis of the subject policy, the plaintiff Condominium Corporation’s bylaws, and the relevant statute to determine that the insurer could not subrogate against Statesman.

The claim at issue related to a fire on a construction project. The subject construction project was the Condominium Corporation, that would be made up of four separate buildings. Two of the buildings were complete and occupied at the relevant time. The other two were in various stages of construction by Statesman and its subcontractors.

A fire broke out in one of the buildings under construction. This fire was allegedly started by a subcontractor to Statesman, making Statesman allegedly vicariously liable for the Fire.

This decision was complicated by the fact that Statesman was both the developer for the insured Condominium Corporation, but also owned condominium units and common property within the finished portions of the Condominium Corporation.

The insurer for the owner of the Condominium Corporation subrogated against Statesman for this fire damage, but was barred from doing so because Statesman was an insured under the Condominium Corporation’s insurance policy as both developer and condominium unit owner.

The Court does find that there could be scenarios in which barring a suit by an insurer against its own insured could lead to a result that was “unfair or capricious.”[10] However, the floodgate of doubtful cases that could open to allow the occasional successful subrogation by an insurer was not worth the burden it would create. This weighing by the Court is best summarized in its own words, “the cure would be worse than the disease.”[11] That said, the Court also stated that “an insurer can negotiate exceptions to coverage or to subrogation waiver clauses before it issues a policy.”[12]

Instance When Subrogation Permitted

An example of when an insurer was permitted to proceed with subrogation against an insured is Morawietz v Morawietz,[13] which is an older decision from the Ontario Court of Appeal. In it, a son was repairing his van on his parents’ driveway. His welding work on his van allegedly started a fire that caused significant damage to his parents’ house.

The Court decided that the son was insured under his parents’ insurance policy for his personal belongings only. He had no insurable interest in the house, which was insured by a different section of the subject insurance policy. The subrogating insurer only sued the son for damage to the house itself. Because of the limited scope of the subrogated claim against the son, the Court found that the insurer could proceed.

It must be noted that both parties in the Morawietz decision were insurance companies. The trial judge wrote that, “the contest is admittedly between two insurers.”[14] While this is interesting, we are left wondering how the policy was worded or arranged to result in this outcome. See, for contrast, the decision, Rochon v Rochon,[15] which has a similar fact pattern, but the insurer was barred from subrogating against the allegedly negligent son because he was found to be an insured under his parents’ homeowners’ policy. This leads us to believe that the arrangement or wording of the insurance policy and the claim mattered a great deal to result in the decision rendered in Morawietz.

Covenant to Insure as Possible Subrogation Bar

A recent decision from the British Columbia Court of Appeal, Catherwood Towing Ltd. v Lehigh Hanson Materials Limited,[16] is a good reminder about contracts outside the insurance policy changing an insurer’s subrogation rights. This decision discusses how a contractual covenant to insure in a contract between the insured and the allegedly negligent third party relieves the third party of liability for losses subject to the covenant, even if it causes such loss.[17] As the covenant to insure in the contract is clearly intended to benefit the third party, it can act as a bar to any subrogated claim being brought against it.[18]

Subrogation waivers given by insureds may be found without the phrase “waiver of subrogation” being used in the contract. If subrogation rights matter, relevant contracts must be closely reviewed when the policy is being put into effect to avoid surprise after a claim occurs.

Insureds Suing Insureds

It is key to note that the subrogated claim must be made in the name of the insured without reference in the pleadings to the insurer. Colloquially, this is referred to as the insurer “stepping into the shoes of” the insured.

There are instances, however, where the insured may sue the negligent third party for the insured loss directly without involving the insurer. This could occur because of oversight or there is confusion around which insurance policy could apply. If this occurs and the negligent third party agrees to settle with the insured directly, the insurer must be advised of, and agree to, such settlement. Insurance legislation in Canada does not release the subrogation rights of the insurer or the insured if either undertakes such direct settlement, without the other’s agreement.[19]

There are also instances where two insureds under the same policy face a dispute outside the contract of insurance. A common example of this is two contractors on a construction site disputing unpaid invoices. In this example, one insured is able to sue the other without triggering the subrogation waiver clauses in the insurance policy placed to protect the construction site because such debt action is being brought outside the insurance relationship.

Takeaways

Both insurer and insured must take steps to ensure the insurance policy will respond as expected when a claim does arise.

• Insureds are encouraged to confirm protection from subrogation where a subrogation waiver is expected before the insurance coverage starts. Confirm you are an insured under specific insurance policies if you expect to be protected from subrogation in the future. This is particularly true in multi-party insurance situations, such as construction sites or property maintenance arrangements.
  
• Insurers are also encouraged to consider whether the waiver will apply as expected when the policy is put into effect.  Are there insureds being added that will bar any chance of subrogation? Is that possibility reflected in the premium calculation?
• It may also be prudent for both insurers and insureds to consider whether exceptions to the subrogation waiver ought to be negotiated into the policy wording prior to the policy being issued. If there are instances where an insurer or insured wants to preserve subrogation rights against another party, that preservation of rights must be clearly set out in the policy documents or certificates of insurance when issued.

Although the courts have held in almost every instance that an insurer cannot subrogate against an insured, this should not be accepted as fact without pausing to consider the policy at issue, any applicable legislation, and any relevant contract(s) that could impact the analysis. This same analysis can be conducted by a party who believes it ought to be protected from a subrogated claim.

The information provided here does not constitute legal advice and is based on details available at time of writing. Perspectives and interpretations around this information will vary depending on the individual circumstances to which they may apply. Consult legal counsel for information and advice relevant to your individual circumstances.

[1] M. L. Marasinghe, An Historical Introduction to the Doctrine of Subrogation: The Early History of the Doctrine II, 10 Val. U. L. Rev. 275 (1976).