The insurance company spent more than $800,000 remediating the property.
After the defendant, Stan Fergusson Fuels, tried to have the claim summarily dismissed, the Court of Appeal found an insurer cannot commence a subrogated action on behalf of an insured when they are bankrupt. Lawyers say the decision could cause issues for counsel pursuing recovery claims on behalf of insurers in certain situations.
“At the time this action was commenced, the insured’s cause of action had vested in his trustee in bankruptcy and the insured was an undischarged bankrupt.
As a result, the insured lacked capacity to bring the action, and the insurer could not commence a subrogated claim in his name,” Assistant Chief Justice Alexandra Hoy wrote in the majority decision.
Anne Juntunen, a partner with Lerners LLP, says the decision means that an insurer’s subrogated rights to recover against an alleged wrongdoer is affected by the insured’s actions after the time the insurance policy is entered into.
Typically, the right of subrogation arises when an insurer makes a payment on a claim.
The insurer could then take a subrogated interest and pursue an action in the name of the insured against whoever would be responsible for the loss.
“What the decision means now is that insurers are affected by whatever their insureds might do or whatever might happen to their insurance,” says Juntunen, who was not involved in the decision.
Amy Pressman, one of the lawyers representing the appellants, says she requested the Court of Appeal to convene a five-member panel as her client was asking the court to reconsider its 2017 decision in Mariner Foods Ltd. v. Leo-Progress Enterprises Inc.
In that decision, the Court of Appeal found that “a subrogated claim brought by an insurer is not caught by a bankruptcy.”
Pressman noted that the Mariner Foods decision relied upon the Divisional Court’s finding in Douglas, while the appeal in that matter was still pending.
Juntunen says it is not typical for the court to convene such a panel, but it does this when there is an existing decision by a three-judge panel that may need to get overturned.
“The court might also convene a five-judge panel if it isn’t sure whether the case needs to be overturned but there is some discussion of it,” she says.
The court would not be able to overrule itself without taking that step, she says.
In the case, Wendy Douglas had no ownership interest in the property, as she had been discharged from a bankruptcy subject to a stipulation that her interest remained vested in her trustee, who remained on title to the property along with her husband.
Art Douglas, however, also filed an assignment in bankruptcy in 2009 and was also replaced on title by the trustee.
The trustee then sold the remediated property in the fall of 2009. State Farm started its action in the name of the Douglases in 2010, before Art Douglas was discharged from bankruptcy later that year.
After State Farm brought its claim, the defendants brought a motion to summarily dismiss it, arguing it was a nullity because the Douglases were not on the title due to bankruptcy proceedings, but the motion judge and Divisional Court let the action proceed.
The Court of Appeal found that a subrogation clause in Douglas’ homeowners’ policy did not permit State Farm to start the action in his name as his cause of action was vested in the trustee.
Juntunen says the decision will likely cause lawyers or insurers to consider their claim resolution processes to ensure that whenever a claim is paid there is also an assignment entered into to solidify any recovery rights they may have.
She adds the decision only affects a subset of insurance recovery matters, in which the insured makes an assignment into bankruptcy and the insurer has not obtained an assignment first.
“It makes it particularly important to know exactly what the status of an insured is at any given time,” she says.
“And in the event there is a bankruptcy that is declared and an assignment into bankruptcy, that means the insurer and the insurer’s counsel are in a position where they may want to take steps to preserve their recovery rights lest they lose those.”
In a dissent, Justices Paul Rouleau and Lois Roberts agreed with the conclusion that the dismissal of the defendant’s motion should be set side, but they said the matter should be remitted back to the Superior Court.
The justices found that State Farm should be allowed to pursue the issue of whether its subrogated action could be brought by substituting the trustee as plaintiff.
“In our view, the effective issue for determination at the original motion was the name in which the claim ought to be brought,” they wrote.
Pressman says this was a very narrow dissent and that all five judges agreed on the law and allowed the appeal.
“The dissent would have permitted a further motion, but [it] did not guarantee the success of that further motion,” says Pressman, a partner with DLA Piper (Canada) LLP.
“The majority thoroughly explained why a further motion would be inappropriate in the circumstances.”
Lawyer Matt Gervan, who represented the respondents, was not available for an interview.