Winter 1999

SUPREME COURT CONSIDERS WAIVER OF SUBROGATION CLAUSES

The Supreme Court of Canada has recently considered the issue of whether a third party beneficiary can rely on a waiver of subrogation clause contained in a contract of insurance. Historically, the doctrine of privity has been interpreted quite strictly to limit the rights of persons to benefit from provisions in contracts to which they are not party. In its recent decision the Supreme Court has moved away from this strict interpretation of the doctrine of privity which it viewed as out of touch with commercial reality. The case the Supreme Court chose to make this move arose after a barge owned by Fraser River Pile & Dredge Ltd. and chartered to Can-Dive Services Ltd. sank.

Fraser River had the barge insured under a Hull Subscription Policy. The insurance policy contained a clause waiving subrogation and extending coverage to affiliated companies and charterers. The insurer paid Fraser River's claim based on a fixed sum stipulated by the policy. Following payment of the loss the insurer entered into a further agreement with Fraser River. In that second agreement, Fraser River waived any right it may have pursuant to the waiver of the subrogation clause in the insurance policy with respect to Can-Dive. An action in negligence was subsequently started against Can-Dive and fought all the way to the Supreme Court. The Supreme Court's decision involved a consideration of whether a principled exception to the doctrine of privity of contract allowed Can-Dive to rely on the waiver of subrogation clause in the insurance policy to defend against the insurer's subrogated claim. The Court applied the reasoning used in London Drugs v. Kuehne & Nagel International Ltd. [1992] 3 S.C.R. 299 which set out the test for distinguishing between strangers to a contract and third party beneficiaries. The test requires that it be intended by the parties to the contract that the relevant provision of the contract confer a benefit on the third party. In addition, the test requires that the actions in question fall within the scope of the agreement between the initial parties. With respect to the intention of the parties the Court concluded that the case for relaxing the doctrine of privity was stronger on the facts of this case than it was in London Drugs. On a plain reading of the subrogation provision the Court found that there was no question that the subrogation clause precluded the insurer from proceeding with an action against third party beneficiaries coming within the class of charterers. On the question of whether the subsequent agreement between the insurer and Fraser River had the effect of deleting any third party benefit given the charterer under the policy of insurance the Court concluded that it did not! The Court was not concerned that this result would unduly interfere with freedom of contract by generally forcing contracting parties to take into account the interests of third party beneficiaries. They were not concerned because they concluded that, on the facts, the second agreement was made after Can-Dive's inchoate right under the contract of insurance had crystallized into an actual benefit in the form of a defence against a subrogated claim by the insurer. With respect to the second aspect of the London Drugs test the Court found that the relevant activity which arose in the context of a relationship of Can-Dive to Fraser River as a Charter was the very activity anticipated in the policy pursuant to the subrogation clause.

Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd. [1999] S.C.J. No. 48, 11 C.C.L.I. (3d) 1.

COURT OF APPEAL: SUBROGATION PRINCIPLES

Two recent Court of Appeal decisions reviewed the principles governing an insurer's right of subrogation. In Tony & Jim's Holding Ltd. v. Silva, the insurer of a strip mall brought a subrogation action against the president of a company which was a tenant in the mall. It was alleged that fire occurred and caused damage to the building as a result of the president's negligence in leaving a gas stove unattended. It was conceded by the insurer that it could not sue the corporate tenant to recover damages because of the established principle that the risk of loss by fire passed to the landlord under a provision of the lease respecting payment of insurance premiums by the tenant, even in the absence of an express covenant to insure. The risk passed to the landlord even though the tenant had an obligation to repair, which, in the absence of the landlord's obligation to insure, would obligate the tenant to repair damage caused by its own negligence.

However, the insurer sought recovery against the president on the ground that he was not a party to the insurance contract and that he was liable for his own negligence regardless of his employer's legal liability.

The Court of Appeal rejected the argument, relying on the recent Supreme Court of Canada decision in London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299, where the court held that employees may benefit from a limitation of liability clause found in a contract between their employer and a third party if the following requirements are satisfied:

1. The limitation of liability clause must, expressly or impliedly, extend its benefit to the employees seeking to rely on it; and

2. The employees seeking the benefit of the limitation clause must have been acting in the course of their employment and must have been performing the very services provided for in the contract between their employer and the third party when the loss occurred.

The Court of Appeal found that there was an identity of interest between the tenant and its president, which satisfied one of the considerations in the London Drugs case. It was observed that by virtue of the lease agreement requiring the landlord to insure losses occasioned by the tenant's negligence, the parties must have understood that the corporate tenant could only be guilty of negligence through its directors or employees. The president's alleged negligent conduct could only be regarded as that of the corporation in this case.

The Court further observed that the policy had a provision that rights of subrogation were waived against any corporation, firm, individual or other interest with respect to which insurance was provided. This was interpreted to mean that the waiver extended to the tenant and to the individuals through which the corporate tenant must act.

Lastly, the Court of Appeal stated that there was an allocation of risk in the lease agreement when the tenant agreed to pay the premiums. Allowing subrogation against the employee of the tenant would defeat the parties allocation of risk and their reasonable expectations. Accordingly, subrogation was held to be barred.

In another case, Sin v. Mascioli, similar principles were applied to a mortgage agreement. The defendant Mascioli sold his property to the plaintiffs and took back a mortgage. It was a term of the vendor-take-back mortgage that the buildings be insured. The insurance policy named Mascioli as loss payee. The building was subsequently destroyed by a fire which was found to have been caused by faulty construction of a chimney. Mascioli was found liable for the negligent construction. The insurer of the plaintiffs paid the damages and sought to subrogate against Mascioli. The Court of Appeal, applying Madison Developments Ltd. v. Plan Electric Co. (1997), 36 O.R. (3d) 80, held that the mortgage included an unqualified obligation on the part of the mortgagor to insure the real property for its full insurable value against loss caused by fire. Having insured the property and having been paid by the insurer for the loss, the insured could not sue the mortgagee for the loss which the insured agreed to insure for the benefit of the mortgagee. Since the insured could not maintain an action against the mortgagee, there was no right to which the insurer could be subrogated.

The principles that could be derived from these cases are that subrogation can be precluded in any of the following circumstances:

1. there was an undertaking by the insured to insure the property on behalf of the third party;
2. the third party contributed towards payment of the insurance premiums;
3. there was an express or implied waiver of subrogation contained in the policy; or
4. there was an expressed or implied waiver of subrogation in the lease or mortgage agreement.

Tony & Jim's Holding Ltd. v. Silva (1999), 43 O.R. (3d) 633 (C.A.) Sin v. Mascioli (1999), 8 C.C.L.I. (3d) 39 (Ont. C.A.)

COURT OF APPEAL DECLINES TO RULE ON WHETHER AN INSURER OWES A DUE DILIGENCE DUTY TO CUSTOMERS OF ITS INSURED

The Ontario Court of Appeal passed recently on a opportunity to pronounce on whether an insurer may be held liable in tort to parties other than its insured for a failure to properly investigate information provided by its insured. The case arose after Lloyd's denied coverage on a claim by its insured because of misrepresentations made by the insured in connection with the issuance and renewal of a policy of insurance. Lloyd's insured an armoured car company, National Armoured Ltd. against liability for losses incurred by National Armoured in the operation of its armoured car business. Lloyd's denied coverage on a claim in relation to an 8 million dollar robbery. The trial judge found that National Armoured had made several material misrepresentations relied on by Lloyd's in issuing and renewing the policies and that Lloyd's was entitled to a declaration that the policy was void. This finding was not challenged on appeal.

The issues on appeal were raised by customers of National Armoured who argued that they were unnamed insureds under the policies, and entitled to recover despite the material misrepresentations made by National Armoured. The appeal court agreed with the finding of the Sharpe, J. at the trial that the policies considered in their entirety could not be read as describing the appellants as an identifiable class whom Lloyd's and National Armour intended to include as insured under the policy.

The appellants also argued that they had relied on National Armoured being insured and that Lloyd's was aware of that reliance and therefore, that Lloyd's had a duty to them to exercise due diligence in issuing the policies to National Armoured, which they had neglected to meet. Due diligence, according to the appellants, required Lloyd's to conduct an independent investigation of representations made by National Armoured.

The Court of Appeal held that this was not an appropriate case to decide the difficult legal and policy questions raised by the appellants' argument. However, assuming that the appellants' submission was sound in law, the Court of Appeal ruled that their claim would fail on the facts.

One of the material misrepresentations that was found to have been made by National Armoured was that a particular individual was only a consultant to the company when, in fact, he was heavily involved in the operations of the company.

The appellants said that had they known of his involvement they would not have placed their funds with National Armoured. They argued that Lloyd's should have been suspicious on the basis of the information provided by National Armoured concerning this person's involvement. The facts of the case suggested that it was brought to Lloyd's attention that there had been some suspicions raised about this person's involvement in the company. However, other contrary information brought to Lloyd's attention suggested that the matter had been investigated quite carefully by individuals familiar with the industry in general and the operation of National Armoured in particular. Given that Lloyd's had no reason to suspect the inaccuracy of that information at the time, the duty claimed by the appellants did not arise.

Lloyd's of London, Non-Marine Underwriters v. National Armoured Ltd. (1999), 174 D.L.R. (4th) 493.

WILFUL MISCONDUCT NOT PROVEN!

An insured left a boat in dry dock for three years. The boat was destroyed by the accumulation of water in the cockpit and the cabin over an extended period of time. An Ontario court judge held that an exclusion in an "all risks" policy for wear and tear and gradual deterioration did not apply. In addition, the insurer was not able to show willful misconduct on the part of the insured. Although negligent in not inspecting the boat, there was no intention to damage the boat. The insurer was liable for the loss.

Russell v. Canadian General Ins. Co. (1999), 11 C.C.L.I. (3d) 284 (O.C.J.)

EXEMPTION CLAUSE IN BILL OF LADING

The Federal Court of Appeal has upheld a decision finding a charterer of a vessel liable for damage to a cargo of lumber that was lost overboard from the deck of a ship during poor weather. The charterer took the position that a broad liability exclusion clause in the terms of the bill of lading covered the shipmaster's negligence in securing the cargo and proceeding in deteriorating weather conditions. The lower court held that although that the exemption clause was broad it did not exclude liability for negligence. On appeal the Federal Court of Appeal indicated that the language of the clause was broad enough to exclude liability for negligence but that in the context of the contract in question it was more likely that the exemption clause was meant to apply to the carrier's common law liability in respect of goods which he carried at his own absolute risk rather than to negligence.

Canadian Pacific Forest Products Ltd. v. Belships (Far East) Shipping (Pte.) (Ltd.) (1999) 89 A.C.W.S. (3rd) 201 (F.C.A.)

IN REM CLAIM REQUIRES PERSONAL CLAIM

The Federal Court Trial Division struck out a plaintiff's claim as scandalous, frivolous and vexatious pursuant to Rule 221(1)(c) Federal Court Rules 1998 because they failed to make a claim in personam against the owners of a ship or its cargo. The ship had been arrested following an alleged breach of contract to catch and deliver shrimp to the plaintiff. The statement of claim was served against a defendant party named as "The Registered Owner by Demise". The court held that this did not describe the owner and
that therefore no claim in personam was made against the owner or cargo of a ship. Without such a claim, no claim in rem against the vessel could be maintained.

Cold Ocean Inc. v. "Gornostaevka (The)", (1999) A.C.W.S. (3rd) 202 (Fed. T.D.)

This newsletter is published to keep our clients and friends informed of new and important legal developments. The articles are not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.