Canada: Subrogation And Assessment Of Claims

Last Updated: October 17 2016
Article by Adam Grant

First presented at a Client Subrogation Seminar.

Subrogation is the mechanism by which an insurer can recover monies that it has paid to its insured by bringing an action in the name of the insured as against a third party who is responsible for the loss.

The right of subrogation is established contractually, at common law, and in section 278(1) of the Insurance Act. Most insurance policies contain language which broadens the right of subrogation beyond that granted by statute and common law.

When can the Insurer Pursue Subrogation?

At law, the insurer's right of subrogation arises only when the insurer has paid the insured for some portion of its loss. Moreover, until the insured is completely indemnified for all insured and uninsured losses, the insured has the right to control the action.1 In order to give the insurer command over a subrogation action, standard terms of the insurance policy will often contain language that stipulates that the right of subrogation is triggered as soon as the insurer assumes liability for a loss, rather than once the insurer has paid any portion of the loss. This wording will also often give the insurer the sole right to control the action, and settle claims without the insured's instructions.

Occasionally, the insured may also initiate an action against the same third party. If both the insurer and the insured commence separate actions, the rule against multiplicity of actions may prevent one of the actions from proceeding. Insurers need to be mindful of this possibility and alert the insured of their intent to pursue a claim in order to prevent the failure of their action.

Where the insured does pursue its own claim, it has an obligation to protect the subrogated interest of the insurer. Likewise, the insurer is obligated to protect any uninsured interest of the insured in its subrogated actions.

What Claims are Suitable for Subrogation?

Some subrogation opportunities are not obvious and will require investigation and creative thinking.

Not all payouts by an insurer for insured losses are fit for litigation and determining what claims are appropriate to pursue is not always a quick or easy task. Some subrogation opportunities are not obvious and will require investigation and creative thinking.

The insurer's first step, after determining the cause of the loss, is to determine who the potential wrongdoers are. In simple terms, the insurer should consider what, if any, third party could be responsible for the wrongdoing. In legal terms, this party would be liable for the loss. Liability describes the state of being actually or potentially subject to a legal obligation.

Some questions to consider in the determination of liability include:

  • Who had last access to the area or the product?
  • Who manufactured the product?
  • Who was the supplier?
  • Who did the installation? Was it a contractor, or a subcontractor?
  • Who was responsible for maintenance?
  • Was there a contract?

Beyond this, the insurer should then examine if and how the loss could have been prevented entirely. One consideration is if the parties could have foreseen the problem prior to the loss. This involves further questions, including:

  • Could the problem have been noticed during movement through the supply chain from the manufacturer to the retailer?
  • Was there something that could have been done during the design, installation, inspection, and/or maintenance steps that could have identified a deficiency or prevented the loss?
  • Was municipal and/or administrative approval obtained?

The insurer should then consider whether parties may have been able to mitigate the loss. These parties would not be responsible for the entire loss, but may be responsible for some portion of it, as they could have prevented the damage being as significant as it was. Among the questions to ask include:

  • Was the emergency response adequate?
  • Was the suppression/alarm system designed and/or functioning properly?
  • Was there adequate security present in the area?

Example: Sprinkler Systems

Sprinkler system failure is a relatively common cause of water damage, and nearly always yields subrogation potential. Failure of the system is almost always due to freezing and bursting of the lines. However, the insurer should not rush to blame cold weather for these freeze-ups.

Wet sprinkler systems are only permitted for use in heated spaces. They should therefore not be able to freeze. There are a number of reasons why a sprinkler system may fail, including inappropriate heating levels, improper design and/or construction of the building envelope, an improperly designed, built, and/or inspected sprinkler system, and the failure to conduct annual inspections. Simply put, wet sprinkler systems should be protected from freeze-ups. If one does freeze, someone has likely done something improper, leading to the failure.

The same holds true for dry sprinkler systems. These systems are intended for unheated spaces, so they contain pressurized air instead of water. If one of these systems fails as a result of a freeze-up, the insurer should consider how the water got into the system, whether the sprinkler was designed and/or constructed with a proper slope, whether the sprinkler system was properly inspected, and whether annual inspections were completed in order to determine what led to the failure. The answers to these questions could identify one or more parties liable for the failure of the sprinkler system.

To establish liability at law, the insurer must prove that the third party breached a responsibility they owed to the insured.

Establishing Liability

To establish liability at law, the insurer must prove that the third party breached a responsibility they owed to the insured. The most common way to establish this breach is to pursue a claim in negligence.

To succeed in a negligence claim, the insurer must show, on a balance of probabilities, that:

  • The wrongdoer had a duty of care/responsibility to the insured;
  • There was a breach of the standard of care;
  • The wrongdoer caused that breach; and
  • The insured suffered damages.

However, should a successful claim in negligence be unavailable, liability can also be established through breach of contract. The insurer should consider whether a party was required to complete work under a contract, including general contractors, property managers, security providers, or other work falling under the Sale of Goods Act.

A third potential avenue to establish liability is through a nuisance claim. Nuisance is the unreasonable interference with the use and enjoyment of land in possession of another. Some examples of nuisance are: smoke damage to an insured's property caused by fire on a neighbour's property, sewage backup caused by a contactor performing work on the public sewage system, and the leaking of a neighbour's fuel tank onto the insured's property. However, not all parties can be legally pursued for nuisance. Nuisance claims against a municipality related to water and sewage damage, for example, are prohibited by s. 449 of the Municipal Act.

Causation

It is not enough for the insurer to claim that the third party was negligent. The insurer must establish, on a balance of probabilities, that the injury would not have occurred "but for" the negligence of the defendant.

In most cases, it is critical to obtain an expert opinion on the cause of the loss, as it represents an objective, detailed assessment which will guide the subrogation investigation. Some simple cases will not necessarily require an expert opinion, but most of them will.

While the legal or ultimate burden remains with the plaintiff, there are cases where the evidence will justify an inference of causation in the absence of evidence to the contrary provided by the wrongdoer. For example, it has been held that an inference of negligence against a manufacturer is compelling where the defect arose during the manufacturing process, which was controlled by the wrongdoer.

It is not always necessary to prove that a third party caused the loss in a specific way. Liability can be established if one can eliminate all reasonable possibilities other than the third party's liability. This is known as inferred liability, and can include cases where there is only one supplier and installer, where the third party had sole access to origin of the loss, or where the third party was the sole entity doing work on an element that caused the loss.

In addition to establishing legal liability, the insurer must also prove damages...

Damages

In addition to establishing legal liability, the insurer must also prove damages, including the quantum of damages being claimed, in order to be successful in their action against the wrongdoer. Depreciation of the value of the goods may reduce the quantum that is recoverable. The insured may also have to prove that there was an attempt to mitigate their damages.

Certain items will likely not be recoverable in the claim. Expert reports and investigation expenses, for example, might not be included in the quantum of damages; however, they may be recoverable as disbursements and/or in a costs award.

Once the insurer has determined the amount that can be reasonably recovered, the insurer should assess whether the quantum is worth pursing in comparison to the anticipated costs of investigating, negotiating, and litigating the claim. It may be that the damages are not significant enough to warrant the costs associated with pursuing the claim. 

Early Investigation Steps

There are a number of steps an insurer should take early in an investigation to determine whether a claim is appropriate for subrogation.

While not all subrogation claims are easily established, the insurer can determine the viability of a claim by conducting a quick and effective investigation.

It is in the insurer's best interests to retain a well-respected expert as early as possible to assess the cause of the loss. However, it is not always beneficial to obtain a written report immediately. Once the expert has completed his investigation, the insurer or adjuster should obtain a verbal report as to the cause of the loss. This may identify other areas that the expert should investigate further, or may make it clear that there is no prospect of subrogation.

In the former case, the investigation can be completed without a report having already been prepared, and in the latter case, the insurer can save the cost of having such a report prepared.

It is vital that the site of the loss and any potential evidence be secured immediately.

It is vital that the site of the loss and any potential evidence be secured immediately. The insurer should also collect witness reports and any public investigation records, such as those from the Ministry of Labour, the TSSA, or the Office the Fire Marshal. The insurer may also consider inviting potential third parties to participate in the investigation and even conduct joint inspections for efficiency and expediency.

Where relevant evidence is in the possession of others, they should be put on notice immediately and be requested to preserve and produce the relevant evidence.

Another important step is to obtain all relevant documents from the insured, such as any contracts, leases, maintenance records, or design drawings associated with the loss.

While mitigating damages is important, all relevant evidence must be secured. This includes any pipes, plumbing fittings, sump pumps, tanks, sprinkler heads, or any other items linked to the loss. If an item failed, or worked improperly, and caused the loss, it should be preserved for testing. It is imperative that the insurer does not let repair contractors destroy the evidence.

Being aware of the best practices regarding subrogation will allow insurers to pursue all viable subrogation claims and to maintain the maximum amount of evidence to aid in any future litigation.

Footnote

1 Zurich Insurance Company Ltd v Ison TH Auto Sales Inc, 2011 ONSC 1870 (CanLII).

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions