Maccaroni et al. v. Kelly et al.; The Co-operators General Insurance Company, Third Party [Indexed as: Maccaroni v. Kelly]

106 O.R. (3d) 116

2011 ONCA 411

Court of Appeal for Ontario,

MacFarland, Rouleau and Epstein JJ.A.

May 30, 2011

Insurance -- Automobile insurance -- Underinsured motorist endorsement -- Plaintiff suing tortfeasors following motor vehicle accident and also suing her own insurer under OPCF 44R endorsement -- Tortfeasors' insurer having itself added as statutory third party and denying liability under its contract of insurance -- Plaintiff settling with tortfeasors and their insurer for $200,000 without consent of OPCF 44R insurer -- Tortfeasors' insurer's liability limits not "reduced by operation of law" because of its off-coverage position or settlement -- Legal determination that third party liability coverage has been limited required before OPCF 44R excess coverage becomes available -- Plaintiff entitled to continue action against OPCF 44R insurer and to attempt to prove entitlement to recover under OPCF 44R endorsement by proving that tortfeasors' insurer was not liable under its policy.

M was allegedly injured in a motor vehicle accident that occurred when the car in which she was a passenger was rear-ended by a vehicle owned and operated by the tortfeasors. The tortfeasors' vehicle was insured by the Co-operators. That policy had third party liability limits of $1 million. M's vehicle was insured by ING. That policy had an OPCF 44R -- Family Protection Coverage (underinsured motorist) endorsement. M sued the tortfeasors and ING. Co-operators had itself added as a statutory third party pursuant to s. 258 of the Insurance Act, R.S.O. 1990, c. I.8. It denied liability under its contract of insurance and took the position that its liability to third parties was limited to $200,000 under s. 258(11) of the Act. M settled her action with the tortfeasors and Co-operators for $200,000 and signed a final release specifically releasing the tortfeasors and the Co-operators in respect of any and all claims arising out of the accident. M then sought to recover the additional money to which she claimed entitlement from ING pursuant to the OPCF 44R endorsement. ING brought a motion for summary judgment dismissing the action on the grounds that there was no genuine issue for trial. The motion was granted. M appealed.

Held, the appeal should be allowed.

The Co-operators' liability limits were not "reduced by operation of law" under the OPCF 44R endorsement because of its off-coverage position or because of the settlement reached without ING's consent. There has to be a legal determination that the third party liability coverage has been limited before the OPCF 44R excess coverage becomes available. Until there is such a determination, the insurer's allegation of policy violation is simply an unproven allegation, and the policy limit will remain that set out in the insurer's policy.

The motion judge erred in holding that the Co-operator's off-coverage position could only be determined in an action where the Co-operators and the tortfeasors were parties. There was no reason why M's action against ING could not proceed. It would be for M to prove her entitlement to recover from ING, and she would have to prove the Co-operator's off-coverage position in order to do so.

APPEAL from the order of Flynn J., [2010] O.J. No. 3838, 2010 ONSC 4447 dismissing an action.

Cases referred to

Somersall v. Friedman, [2002] 3 S.C.R. 109, [2002] S.C.J. No. 60, 2002 SCC 59, 215 D.L.R. (4th) 577, 292 N.R. 1, J.E. 2002-1464, 163 O.A.C. 201, [2002] R.R.A. 679, 39 C.C.L.I. (3d) 1, [2002] I.L.R. I-4114, 25 M.V.R. (4th) 1, 115 A.C.W.S. (3d) 695, consd

Other cases referred to Maccaroni v. Kelly, [2008] O.J. No. 4131, 170 A.C.W.S. (3d) 849 (S.C.J.)

Statutes referred to

Insurance Act, R.S.O. 1990, c. I.8, s. 258, (11)

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 20, 31.10, 53.04

William G. Scott, for appellants. Donald G. Cormack, for respondent. No one appearing for third party.

The judgment of the court was delivered by

[1] MACFARLAND J.A.: -- This is an appeal from the order of Flynn J. dated August 13, 2010, wherein he dismissed the within action and ordered costs to be determined and fixed following receipt of written submissions.

[2] For the reasons that follow, I would allow the appeal, set aside the order of Flynn J. and in its place an order shall issue dismissing the respondent's motion for summary judgment.

The Facts

[3] The appellant, Mary Maccaroni, alleges she was injured in a motor vehicle accident that occurred on February 16, 2003, when the car in which she was a passenger was rear-ended by a vehicle operated by Kevin Kelly and owned by his mother, Donna Ainsworth.

[4] At the time of the accident, the Ainsworth vehicle was insured by the Co-operators General Insurance Company ("Co-operators"). That policy had third party liability limits of $1 million.

[5] The Maccaronis' vehicle was at the time insured by ING/Halifax Insurance Company of Canada ("ING"). That policy had what is known as an OPCF 44R -- Family Protection Coverage endorsement. This endorsement provided additional coverage in the event that injuries were occasioned to the policyholder in circumstances where the tortfeasor was either uninsured or underinsured, in the sense that the limits of coverage under OPCF 44R were greater than the third party liability limits of coverage available to the tortfeasor. The OPCF 44R endorsement also had coverage limits of $1 million.

[6] The appellants issued a statement of claim on October 1, 2003. In that claim, the appellants named the tortfeasors Kevin Kelly and his mother, Donna Ainsworth, the operator and owner, respectively, of the Ainsworth vehicle. They also named ING, Ms. Maccaroni's own insurer, pursuant to the OPCF 44R endorsement.

[7] Co-operators obtained an order adding itself as a statutory third party pursuant to the provisions of s. 258 of the Insurance Act, R.S.O. 1990, c. I.8. It took the position that Mr. Kelly's driver's licence was suspended at the time of the accident and that Ms. Ainsworth permitted Mr. Kelly to operate her motor vehicle when she knew or ought to have known that Mr. Kelly did not have a valid driver's licence. Co-operators further alleged that neither Mr. Kelly nor Ms. Ainsworth co-operated in the investigation of the action.

[8] In view of the breach of statutory conditions it alleged, Co-operators denied liability under its contract of insurance and took the position that its liability to third parties was limited to $200,000, pursuant to s. 258(11) of the Insurance Act.

[9] Thereafter, the appellants settled their action with the tortfeasors and Co-operators in exchange for the statutory minimum limits of $200,000. ING neither consented to the settlement nor to the dismissal of the action against the tortfeasors and Co-operators. [See Note 1 below] ING took the position that the appellants' damages, in any event, did not exceed the $200,000 they had been paid by Co-operators, and specifically rejected the off-coverage position Co-operators had taken. As part of the settlement, Ms. Maccaroni signed a final release wherein she specifically released Kevin Kelly, Donna Ainsworth and the Co-operators in respect of any and all claims arising out of the February 16, 2003 motor vehicle accident. Further, she agreed that the payment did not constitute any admission of liability on the part of the three releasees and declared that the payment was

accepted voluntarily for the purpose of making a full and final compromise, adjustment and settlement of all claims for losses and damages resulting or to result from the said incident.

[10] The appellants then sought to recover the additional money to which they claimed entitlement from ING pursuant to the OPCF 44R endorsement.

[11] On March 18, 2010, ING brought a motion for summary judgment, pursuant to Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, to dismiss the appellants' action as against ING on the grounds that there was no genuine issue for trial.

[12] At the motion, ING took the position that there had never been a legal determination of the off-coverage position taken by Co-operators and, accordingly, Co-operators' limit of liability was never reduced by "operation of law" or otherwise from the certificate amount of $1 million to the statutory minimum limit of $200,000.

[13] Further, ING argued that no such legal determination could now be made because the appellants had released both tortfeasors and Co-operators from the action.

[14] The motion judge accepted both positions argued by ING. He found there was no genuine issue requiring a trial and granted summary judgment dismissing the action against ING.

Analysis

[15] The OPCF 44R endorsement is intended to protect an insured policyholder in the event she is involved in an accident in circumstances where the limit of liability she has under this endorsement is greater than the third party liability limits of the tortfeasor whose actions caused her injuries. In the event the policyholder's damages exceed the third party liability coverage, then the policyholder can recover from her own insurer under the OPCF 44R endorsement to her own policy.

[16] The endorsement provides:

1.5 "inadequately insured motorist" means (a) the identified owner or identified driver of an automobile for which the total motor vehicle liability insurance . . . obtained by the owner or driver is less than the limit of family protection coverage . . . . . . . . . .

1.8 "limit of motor vehicle liability insurance" means the amount stated in the Certificate of Automobile Insurance as the limit of liability of the insurer with respect to liability claims, regardless of whether the limit is reduced by the payment of claims or otherwise;

PROVIDED THAT in the event an insurer's liability under a policy is reduced by operation of law to the statutory minimum limits in a jurisdiction because of a breach of the policy, the statutory minimum limits are the limits of motor vehicle liability insurance in the Policy.

[17] The insuring agreement of the OPCF 44R provides that

3. . . . the insurer shall indemnify an eligible claimant for the amount that he or she is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of bodily injury to or death of an insured person arising directly or indirectly from the use or operation of an automobile.

[18] The Co-operators' policy has a third party liability limit of $1 million. The ING OPCF 44R endorsement also has a limit of $1 million.

[19] The issue here is really whether the Co-operators' liability limits are "reduced by operation of law" merely on its say-so or because of a settlement reached without the consent of the OPCF 44R insurer. In other words, is it enough to allege breach of policy conditions to reduce the liability limits of coverage available to pay third party claimants and then settle by paying the reduced limits? I think not. The words "by operation of law" must have some meaning beyond a liability insurer merely taking an off-coverage position and settling on this basis. The third party liability coverage is intended as first-loss insurance and the OPCF 44R as excess. Therefore, there must be a legal determination that the third party liability coverage has been limited before the OPCF 44R excess coverage becomes available. [See Note 2 below]

[20] By alleging policy violation and adding itself as statutory third party, the insurer who takes an off-coverage position, as Co-operators did here, merely preserves its position. It will then be an issue to be determined in the subsequent litigation. If the insurer's position is borne out by the evidence and it is proved, on a balance of probabilities, that the insured has breached the conditions of the policy, then the liability policy limits will be reduced accordingly by virtue of s. 258(11) of the Insurance Act to the statutory minimum limits. It is the effect of s. 258(11) of the Act that reduces the limits of the policy to the statutory minimum where it is determined there has been a breach of a policy condition "by operation of law". Until there is a finding, however, the insurer's allegation of policy violation is merely that, an unproved allegation, and the policy limit will remain that set out in the insured's policy.

[21] I agree with the motion judge's conclusion, set out in para. 25 of his reasons:

I agree with ING that there never has been a legal determination with respect to the off-coverage position taken by Co-operators and that therefore Co-operators limit of liability was never reduced by operation of law from the Certificate amount of a million dollars to the statutory minimum of $200,000.

[22] The only remaining question is whether the appellants' action against ING can proceed. The motion judge held it could not. He concluded, at para. 26 of his reasons:

And I further agree with ING's argument that no such legal determination can now be made, since the plaintiff has released the tortfeasors and Co-operators from this action.

[23] The motion judge was of the view that the Co-operators' off-coverage position could only be determined in an action where Co-operators and its policyholders, the tortfeasors, were parties. I do not agree with this conclusion. In my view, there is no reason why the appellants' action against ING may not proceed. It will be for the appellants to prove their entitlement to recover from ING and they will have to prove Co-operators' off-coverage position in order to do so. The fact that Co-operators and the tortfeasors are not parties to the proceeding is of no moment. The tortfeasors and representatives of Co-operators can be called as witnesses and can be examined under oath as non-parties: see rules 31.10 and 53.04 of the Rules of Civil Procedure. While a factual finding made in respect of the coverage issue will bind neither Co-operators nor the tortfeasors vis-à-vis the appellants in view of the release, such a finding can determine, as between the appellants and ING, whether the appellants are entitled to recover anything from ING. If the appellants are successful and establish that the tortfeasors were in breach of their policy provisions, and hence that the off-coverage position taken by Co-operators is correct, they may be entitled to recover from ING. If they are not successful, their action will be dismissed and they will, absent exceptional circumstances, be liable for the costs of those proceedings.

[24] Furthermore, it is, I think, arguable on the basis of the Supreme Court of Canada's decision in Somersall v. Friedman, 2002 SCC 59, [2002] 3 S.C.R. 109, [2002] S.C.J. No. 60 that the appellants may well have a claim against ING in spite of their settlement agreement with Co-operators and the tortfeasors. The plaintiffs in Somersall had settled their claims with the third party liability insurer for the policy limits and agreed not to pursue the tortfeasor for any amount over those limits. They then sought to recover their damages, over and above those policy limits from their own insurer under a SEF 44 Family Protection endorsement (similar to a OPCF 44R endorsement). The majority concluded, on the facts of that case, that the plaintiffs' settlement did not bar their right to pursue their own insurer for damages claimed above the settlement figure.

[25] This is not to say, however, that an argument cannot be made that Somersall does not apply. The facts in Somersall differ from the facts in this case. Significantly, in Somersall, the plaintiffs' agreement with the third party liability insurer was for the full limits of that policy -- there is no suggestion that the agreement was for minimum statutory limits only. [See Note 3 below] That, of course, is not this case where there is a potential of an additional $800,000 of coverage available as excess insurance. It is significant that in Somersall there was no issue that the tortfeasor was inadequately insured. His policy limits were less than the SEF 44 limits and accordingly all the insured claimants had to prove in their claim against their insurer (SEF 44 insurer) was that they were "[l]egally entitled to recover from an inadequately insured motorist." Further, the court in Somersall seemed to lay particular emphasis on the fact that the tortfeasor had no "capacity to compensate" the plaintiffs or was "impecunious". The record in the present case does not show whether the tortfeasors are impecunious. Thus, it would seem, the law is not settled on this point.

[26] In my view, it is not plain and obvious that there is no genuine issue requiring a trial. The appellants should be permitted to continue their suit against ING. ING may raise any defences it deems appropriate.

[27] For these reasons, I would allow the appeal, set aside the order of the motion judge and in its place an order shall issue dismissing the motion of the respondent, ING.

[28] Costs of the appeal to the appellants fixed in the sum of $7,500, inclusive of disbursements and HST, a figure to which counsel have agreed.

[29] By agreement of counsel, the setting of the costs of the motion below is remitted to the motion judge for determination.

Appeal allowed.

Notes

Note 1: As originally filed on December 6, 2005, the consent to the dismissal of the action included the dismissal of the appellants' claim not only as against the tortfeasors and Co-operators but also as against ING. On September 12, 2008, the appellants brought a motion for an order setting aside the dismissal as against ING. Harris J. allowed the motion [[2008] O.J. No. 4131, 170 A.C.W.S. (3d) 849 (S.C.J.)], finding that the appellants' solicitor had inadvertently filed a consent to the dismissal of the entire claim. On August 7, 2009, ING's motion for leave to appeal the order setting aside the dismissal to the Divisional Court was dismissed.

Note 2: See s. 7 of the OPCF 44R endorsement.

Note 3: It will be recalled that the date of the motor vehicle accident in Somersall was January 29, 1989.