Canada: Ontario Court Of Appeal: Insurers Lose Subrogation Rights When Insureds Assign Into Bankruptcy

Last Updated: April 4 2018
Article by Tahsin Najam

Weighing in at the intersection of bankruptcy law and the doctrine of subrogation, the Ontario Court of Appeal has ruled that insurers are not entitled to commence subrogated claims in the name of bankrupt insureds.

In Douglas v. Stan Fergusson Fuels Ltd., the insureds had arranged for the appellants to deliver fuel oil to their home's external oil tank. The fuel oil escaped and contaminated their property. They were covered under a Homeowners Policy which contained a subrogation clause.1 The insurer paid for the cleanup resulting from the spill.

The insureds subsequently filed an assignment into bankruptcy after which they were assigned a trustee who replaced them on the title to the property. The trustee advised the insurer of this assignment and signed a disclaimer reciting the trustee's intention to sell the property as soon as it was remediated. However, the trustee disclaimed interest in insurance claims by the insureds for "loss or damage...to matrimonial household contents not affixed or enjoyed with the residential property or proceeds of personal property..."

The insurer continued to pay out the insureds' claims, spending over $800,000 to remediate the property. It then commenced an action against the appellants in the name of the insureds, claiming damages not restricted to those described in the disclaimer. It launched the action prior to the insureds' discharge from bankruptcy.

Trial & Divisional Court judgments

The appellants brought a summary judgment motion arguing that the insurer's action was a nullity given that the insureds lacked capacity to commence the action by virtue of their bankruptcy. The appellants' motion to strike the claim was dismissed in the trial judgment. The motion judge found that the insurer's right of subrogation was a "contingent right that vested at the time the policy was entered into" and that the insurer became the one with a real interest in the decision "once the [insureds] were fully indemnified."

Because subrogated claims are derivative in nature and an undischarged bankrupt is unable to bring an action to enforce property claims, the Divisional Court concluded that an insurer was also barred from making a derivative subrogation claim. However, the court dismissed the appeal because the insurer had a "vested contingent right to assume the [insured's] right to recover and to bring an action." This right had crystallized before the insureds' assignment into bankruptcy when the insurer had assumed liability for the insureds' losses.

Court of Appeal decision

This is how the appeal court addressed the three broad issues:

1. The insurer's property interest in the insureds' cause of action

In the court's view, the cause of action did not vest in the insurer before the insureds' bankruptcy. When an insurer is subrogated to the claim of its insured, the claim nonetheless remains that of the insured in whose name and with whose rights the claim must be advanced. Subrogation is not the equivalent of assignment despite having similar aspects. This was a sophisticated insurer and it would have been a simple matter for it to include an assignment clause in the Homeowners Policy if it indeed intended that the insureds assign their cause of action to it. The trustee's disclaimer also operated as no more than a signal from the trustee to the insurer that insurance proceeds for damage to excluded property could be paid out directly to the insureds. The insureds' cause of action was not excluded in the disclaimer but was "property" that passed to and vested in the trustee at the time the insureds filed their assignment into bankruptcy, pursuant to s. 71 of the Bankruptcy and Insolvency Act.

2. The subrogation clause where the insureds are undischarged bankrupts

The insurer argued that a trustee acquires title to the bankrupt's assets subject to all equities existing at the date of bankruptcy. However, the court found that the jurisprudence was clear that an undischarged bankrupt lacks capacity to commence an action in their name if their cause of action vested in the trustee on their assignment or at any time before their discharge. Because the trustee acquired the insureds' cause of action subject to the insurer's right of subrogation, the insurer was entitled to commence the action in the trustee's name. This course of action would have given effect to both the objectives of the doctrine of subrogation and established principles of bankruptcy law. The court determined that upon bankruptcy, the subrogation clause in an insurance policy should be read as if the trustee's name appears in place of the bankrupt insured.

3. The request for a remedial order

Finally, the appeal court decided that the insurer was not entitled to a remedial order under the Bankruptcy and Insolvency Act. While the court acknowledged that it could vary a bankrupt's date of discharge under ss. 40(2) of the BIA, it chose not to do so in the circumstances at hand. In doing so, the court distinguished a previous case where the bankrupt had received a conditional discharge before commencing the action, with only administrative delay and backlog standing between the bankrupt and absolute discharge. In the present case, the insureds' date of discharge was months after the insurer had commenced its action. An order applied retroactively to correct an earlier ruling could also not be made under s. 38 of the BIA as the insurer had not complied with the procedure required by the provision; ie. requesting the trustee to take a proceeding against the appellants. Further, the first request for this order was now being made almost seven years after the limitation period for the action had expired. The court held that the claim should not be amended on the basis of correcting a "misnaming or misdescription of a party" as provided for in the Limitations Act, 2002. The insurer had chosen to commence a claim in the insureds' name and it could not be said that the decision was a "misnaming or misdescription." The appeal court allowed the appeal and dismissed the subrogated action commenced by the insurer in the name of the insureds.

Conclusion

In delivering this judgment, the Court of Appeal provided a helpful overview of the principles of bankruptcy and subrogation law. Moving forward, insurers contemplating bringing a subrogated action on behalf of bankrupt insureds should ensure that the right to the cause of action has not already vested in the trustee. If so, insurers should bring the claim in the trustee's name or risk having their subrogated claim dismissed for lack of capacity.

Footnotes



[1] Subrogation Clause: "We will be entitled to assume all your rights of recovery against others and bring action in your name to enforce these rights when we make payment or assume liability under this 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.

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
Samis + Company
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Samis + Company
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