Canada: Defendant Home Warranty Insurer Need Not Pay Claim Before Issuing Third Party Notice Against Those Responsible For Damage

A recent BC Supreme Court decision in The Owners, Strata Plan 4249 v. Travelers Insurance Company of Canada confirms that an insurer defending itself in a first party policy lawsuit is entitled to issue third party notices for subrogation against those responsible for the loss.

The Action

The action involved a claim by the Owners of units within a building called the "Beasley" for alleged defects in materials and installation of the Beasley's fire suppression system. A leak in the sprinkler lines of the fire suppression system caused extensive damage to a number of units in the Beasley and some of its common areas.

Travelers provided the statutory home warranty insurance policy for the Beasley. The warranty provided that if Travelers made a payment under it, Travelers was subrogated to all rights of recovery of an insured owner against any entity who may have caused or contributed to the loss paid for under the warranty.

After the leak, the Owners claimed under the warranty, claiming that there were defects in the sprinkler system. Travelers denied coverage on the basis that:

  • the claim was made outside the coverage of the warranty coverage period; and
  • the work and materials were not negligently installed or did not fail to meet the requirements of the Building Code such that the losses were not caused by a "defect" as defined in the warranty.

The Owners filed a Notice of Civil Claim against Travelers, alleging that Travelers breached the warranty terms by failing to remediate the deficiencies in the sprinkler system (the "Warranty Action").

The Owners also started a separate claim in negligence against a number of parties involved in the design and installation (the "Negligence Action").

The Application

Travelers brought an Application in the Warranty Action seeking leave to file a Third Party Notice against 13 different parties including companies and professional engineers. Several of the proposed third parties were named defendants in the Negligence Action. There was no contractual relationship between Travelers and any of the proposed third parties; the legal basis for the third party claims was through subrogation.

Two of the proposed third parties, Ironstone Engineering and its principal Gerard Elston Johnston (collectively "Ironstone"), objected to being added. Mr. Johnston was the Sprinkler Design Engineer of record for the Beasley and the principle of Ironstone Engineering. Ironstone provided consultant services for the Beasley developers and was responsible for field reviews of the installation and inspection of the Sprinkler System. Ironstone was not a named defendant in the Negligence Action.

Among other grounds, Ironstone opposed the Application on the basis that the subrogated claim had not crystalized because Travelers had not paid out under the warranty.

The Law

The Application was brought pursuant to Rule 3-5 of the Supreme Court Civil Rules which governs third party claims. Master MacNaughton noted that Rule 3-5 is more restrictive than the former Rule 22(3) and forces a defendant to give early consideration to the question of adding any additional parties.

On an application for leave to issue a third party notice the court must be satisfied that it is just and convenient that the proposed third party be added. Determining this requires a balancing of the prejudice from allowing the applicant to proceed by way of third party pleadings or from requiring it to pursue its claim in a separate proceeding. The court will consider:

  • the merits of the proposed claim;
  • the prejudice to the parties;
  • the expiration of a limitation period;
  • any delay in the proceedings; and
  • the timeliness of the application.

The Decision

The court noted that there was no limitation period issue and accepted that there was potential merit to the claim against Ironstone.

Master MacNaughton held that many of the issues between the Owners and Travelers related to the issues in Travelers' claim against Ironstone. Thus, the court was satisfied that Travelers had established that there is a question or issue between it and Ironstone which was related to, or was connected with, relief claimed in the Warranty Action and should properly be determined within one action.

Ironstone was unable to point to any prejudice it would suffer by being added to the Warranty Action other than having to participate in a trial having some issues in which it had no interest. The court held that prejudice was outweighed by the potential for inconsistent finding if Ironstone was not added to the Warranty Action and two actions became necessary.

In addition, Master MacNaughton rejected the notion that in all cases a subrogated claim is barred until an insurer has paid under its policy.

The court found that, historically, the case law was unclear as to whether or not an insurer must pay out under its policy before it could bring a subrogated claim. However, most modern Canadian rules of civil procedure, and resulting cases, suggest that payment under a policy is not necessary before the subrogated third party proceeding may be brought.

In conclusion, the court held that it was just and convenient to add Ironstone as a third party.

The Impact

In this particular matter there was no issue with the limitation period; however, it is important to note that section 16 of the Limitation Act provides that:

16 A claim for contribution or indemnity is discovered on the later of the following;

  1. the day on which the claimant for contribution or indemnity is served with a pleading in respect of a claim on which the claim for contribution or indemnity is based;
  2. the first day on which the claimant knew or reasonably ought to have known that a claim for contribution or indemnity may be made.

This case indicates that the limitation period will not be extended until an insurer has paid out under its policy. Thus, parties should be putting their minds to potential third parties at the beginning of a matter regardless of whether or not payments have been made under the subject policy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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