Supreme Court of Canada rules against BC trial lawyers in disputed subrogated Ontario auto claim

If the Trial Lawyers Association of British Columbia had its way, auto insurers would have an incentive to go the “extra mile” in trying to find reasons to deny claims, two Supreme Court of Canada judges suggested in a decision released Thursday.

In Trial Lawyers Association of British Columbia v. Royal and Sun Alliance Insurance Company of Canada, the Supreme Court of Canada has upheld Bradfield v Royal Sun Alliance Insurance Company of Canada, released in 2019 by the Court of Appeal for Ontario.

That case arose from a disputed subrogated claim by State Farm Canada against RSA Canada. It was settled before reaching the nation’s top court but the Trial Lawyers Association of B.C. got permission to replace Jeffrey Bradfield (insured by State Farm) as appellant.

In 2006, a vehicle collision injured three and killed Steven Devecseri, who was riding his motorcycle in front of two fellow motorcyclists, one of whom was Bradfield. Devecseri had driven onto the wrong side of the road and collided with an automobile driven by Jeremy Caton. Bradfield, Caton and the third motorcyclist were injured.

Multiple lawsuits ensued, including one filed by Caton, who was ultimately awarded $1.8 million in damages, with Devecseri’s estate (insured by RSA) 90% liable and Bradfield 10% liable.

Separately, Bradfield sued the estate of Devecseri and settled.

(The lawsuits took place long before Desjardins acquired State Farm’s Canadian operations and Intact acquired RSA’s Canadian operation).

RSA started to defend Bradfield’s lawsuit against Devecseri. But in 2009, RSA discovered that Devecseri had been drinking alcohol before the accident. That would mean Devecseri was in violation of his M2 motorcycle licence conditions and also in breach of his auto policy.

State Farm took RSA to court, arguing that RSA could not take an off-coverage position three years later. Bradfield had a family protection endorsement from State Farm. If RSA could take an off-coverage position, then the maximum RSA would have to pay out is $200,000, instead of $800,000. The original 2018 ruling meant that RSA had to pay out $800,000. The 2019 Court of Appeal for Ontario ruling (now upheld by the Supreme Court of Canada) meant that RSA only had to pay out $200,000.

The Supreme Court of Canada was asked to rule on whether the doctrine of “promissory estoppel” means that RSA cannot take an off-coverage position. The Nov. 18 ruling means RSA is not estopped from taking its off-coverage position.

“It is this simple: RSA lacked knowledge of the facts demonstrating Mr. Devecseri’s breach,” Justices Michael Moldaver and Russell Brown wrote for the majority in the ruling released Nov. 18, 2021.  “This is not a case where RSA knew of Mr. Devecseri’s consumption of alcohol but failed to appreciate it as putting him in breach.”

RSA found out about the alcohol when the third motorcyclist was examined for discovery. A coroner’s report did indicate Devecseri had alcohol in his blood. RSA was not aware of that medical data until 2009.

Six of the seven Supreme Court of Canada judges hearing the case rejected the Trial Lawyers argument that RSA was estopped from denying coverage because RSA “constructively knew” of the policy breach.

Although State Farm has settled its subrogated claim against RSA before the Supreme Court of Canada heard it, the Trial Lawyers Association of B.C. argued there is an important matter of principle. The association argued that a motor vehicle accident plaintiff could have a problem if the defendant’s insurer, some time into the litigation process, asserts that there is a breach of policy by the defendant. This, the trial lawyers said, would leave the plaintiff and co-defendant in a situation in which the defendant is likely to not have enough money to pay out on a judgement.

The trial lawyers argued that RSA should have found out, early on the process, about the coroner’s report. RSA had “presumed knowledge” of what should have been discovered in an investigation, lawyer Ryan Dalziel for the Trial Lawyers said May 17, 2021 during the Supreme Court of Canada hearing.

Six of the seven judges hearing the appeal disagreed.

“As claims arise under a policy of liability insurance, insurers are bound by a duty to the insured to investigate each claim ‘fairly,’ in a ‘balanced and reasonable manner,’ and not engage in a relentless search for a policy breach,” Justices Moldaver and Brown wrote for the majority.

“The incentives operate differently where, as here, we are concerned with claims under an existing contract. At that stage, the insurer has every incentive to search for breaches in relation to a given claim. We fear that, far from tempering these incentives, Trial Lawyers’ submission would augment them, pushing insurers to go the extra mile to find policy breaches.”

In separate reasons, Justice Andromache Karakatsanis agreed that the trial lawyers’ appeal should be dismissed, but for different reasons. She said the doctrine of promissory estoppel does not always require actual knowledge.

“If it were industry practice to immediately obtain a police report after a motor vehicle accident, and this practice was generally known or the insurer knew that the person relying on the promise had knowledge of this practice, then it would be reasonable to interpret the insured’s conduct in light of an assumption that they were aware of the contents of the police report. The fact that an insurer, through mistake or negligence, actually failed to obtain the report would not be decisive to an objective interpretation of their conduct unless the insured knew that the insurer had not obtained the report.”

But Justice Karakatsanis still sided with RSA because the insurer did not make a promise or assurance that can be reasonably interpreted as intending to alter legal relations.

The fact that RSA continued defending its client’s estate for a few years did not signify any intent to change legal relations, wrote Justice Karakatsanis. She noted the police report on the accident made no reference to alcohol.

“None of the motorcyclists told the police about alcohol consumption; Mr. Bradfield never told RSA’s investigators or his own insurer about alcohol consumption,” she wrote.

That lack of knowledge on RSA’s part is “fatal” to the notion that RSA is estopped from denying coverage, the majority ruled.

“A promisor, such as RSA, cannot intend to alter a relationship by promising to refrain from acting on information that it does not have. If RSA is to be taken, by having furnished a defence, as having intended to affect a relationship with Mr. Bradfield by extending coverage notwithstanding Mr. Devecseri’s breach, it must be shown to have known of the facts which demonstrate that breach,” Justices Moldaver and Brown wrote.

While an insurer has a duty to investigate fairly, in a balanced and reasonable manner, the client is also under a reciprocal duty to disclose facts material to the claim, the majority ruled.

“Viewed in light of the reciprocity of obligations between the actual contracting parties — the insurer and the insured — there is a certain absurdity to Trial Lawyers’ position. It would effectively mean that a contract of liability insurance provides greater protection to, and imposes fewer (indeed, no) obligations upon, third parties like Mr. Bradfield than it provides to and imposes upon the first‑party insured,” wrote Justices Moldaver and Brown.