Scottish & York Insurance Co. Ltd. v. Somersall, 2002 SCC 59

Somersall v. Friedman, [2002] 3 S.C.R. 109, 2002 SCC 59

Scottish & York Insurance Co. Ltd. Appellant

v.

Pearl Somersall, Gwendolyn Somersall and Janice Somersall Respondents

Indexed as: Somersall v. Friedman

Neutral citation: 2002 SCC 59.

File No.: 27851.

2002: January 21; 2002: August 8.

Present: McLachlin C.J. and L’Heureux‑Dubé, Gonthier, Iacobucci, Major, Binnie and LeBel JJ.

on appeal from the court of appeal for ontario

Insurance -- Automobile insurance -- Underinsured driver coverage -- Subrogation -- Limits agreement between insured and underinsured tortfeasor made without notice to insurer -- Agreement providing that tortfeasor would admit to fault at trial and that insured would not pursue damages beyond limits of tortfeasor’s insurance -- Insurer denying insurer’s claim for damages over and above tortfeasor’s coverage limit -- Whether limits agreement justifying denial of claim.

Two of the respondents suffered serious injuries in a motor vehicle collision and brought an action against the driver of the other vehicle, an underinsured motorist. The third respondent based her claim on s. 61 of Ontario’s Family Law Act. The respondents later entered into a limits agreement with the tortfeasor, without notice to the appellant, their insurer. This agreement provided that (1) the tortfeasor would admit liability at trial and (2) the respondents would not sue him in excess of his liability coverage. The respondents sought to recover the remainder of their damages from the appellant pursuant to their underinsured driver coverage known as the SEF 44 Endorsement which requires that an insured must be “legally entitled to recover” damages from the underinsured motorist in order to collect payment from the insurer. When the appellant cross-claimed against the underinsured motorist, he submitted in his defence that the respondents were bound by the limits agreement. The appellant then moved before trial for a determination of its liability on a question of law. The motions judge ruled that the limits agreement precluded the respondents from advancing a claim against the appellant pursuant to the SEF 44 Endorsement. The Court of Appeal, however, allowed the respondents’ appeal.

Held (Major and Binnie JJ. dissenting): The appeal should be dismissed.

Per McLachlin C.J. and L’Heureux-Dubé, Gonthier, Iacobucci and LeBel JJ.: The limits agreement, like a limitation period, does not block the action. It has no bearing on the right of the insured against the tortfeasor at the time of the accident, which is the relevant time for the determination of legal entitlement. The promise by the respondents not to pursue the underinsured motorist beyond his policy limits has no bearing on any question of the legal entitlement that existed at the time of the accident. It only renders the respondents unable to further their legal rights against the tortfeasor in the courts. This rationale and result sit comfortably with both the policy purpose and the contractual nature of underinsured and uninsured motorist coverage. The respondents are precisely within the zone which SEF 44 coverage is designed to patch over within the Ontario system of mandatory insurance. The terms of the policy and public policy alike support their claim.

The respondents have not interfered with the appellant’s rights of subrogation to such an extent as to deprive it of a right it acquired in the contract. Only a clear and unambiguous obligation upon the insured to maintain a claim in tort and not to waive it in exchange for a payment can support an interpretation favourable to the appellant. Further, it has long been the law, in the absence of contractual terms to the contrary, that the insurer’s right of subrogation will not arise until the insured has been fully indemnified. Here, the appellant’s right of subrogation has not yet arisen, and in any event there is no evidence that the respondents did not honestly and in good faith believe that it was prudent and wise to enter into the limits agreement. Absent any evidence of actual or probable loss, the insurers should not be allowed to raise an alleged breach of subrogation rights in order to bar a claim made in good faith by the insured. Moreover, the plain language of the contract does not support a finding that the limits agreement interfered with a contractual right of the appellant. The only clear obligation on the insured is to “cooperate with the insurer” (except in a pecuniary way) in the pursuit of the action, but this obligation only arises once a payment has been made, and no payment has yet been made here. If there is an ambiguity in the content of this obligation, the interpretive principle contra proferentem would demand that it be resolved in favour of the insured.

A finding that the limits agreement somehow interferes with the right of subrogation to such an extent as to nullify the right of the insured to indemnity would seriously undermine the position of the case law that the direct action against the insurer exists at all. Since subrogation rights against underinsured or uninsured drivers are rarely very valuable, it would be over-reaching to regard its loss as significantly changing the insurer’s position.

The minority’s position on s. 278(6) of the Insurance Act was agreed with. The provision cannot assist the insurer because it has neither made any payment nor assumed any liability therefor as required by s. 278(1).

Per Major and Binnie JJ. (dissenting): Ambiguities with respect to cover are to be resolved in favour of the insured. The language of the SEF 44 Endorsement, however, is not ambiguous and clearly requires that the insured refrain from acts destructive of the insurer’s subrogation interest. There must be a subsisting right of action against the tortfeasor at the time the claim is asserted against the insurer. It is not sufficient that it exists at the time of the accident. The expression “is legally entitled to recover” is framed in the present, not the past, tense. The respondents had no legal entitlement as of the date of their claim against the appellant.

Subrogation is a matter of substance, not form. The fact that the respondents signed a limits agreement rather than a release of the cause of action was of little importance for, in either case, the insurer is precluded from a successful claim over. The risk undertaken by the appellant was not the whole of the respondents’ loss but the loss reduced, at least potentially, by assigning the insurer all proper and available means of reimbursement. Although the right of subrogation cannot be exercised until payment is made, it is a contingent right that vests at the time the policy is entered into. For the Court now to add the requirement that an insurer denied subrogation must prove that the denial did in fact result in “actual and probable loss” ignores the wording of SEF 44 and introduces unnecessary uncertainty in its day-to-day application. The amount to which the insured is legally entitled is determined by the insurance contract, and the terms of the SEF 44 Endorsement explicitly make subrogation part of the package accepted by both parties to the insurance contract. If the insured has prejudiced the subrogation rights of the insurer then it is open to the insurer to refuse the claim.

The appellant could not move to set aside the limits agreement under s. 278(6) of the Insurance Act because that provision is intended to protect the interests of an insurer who has paid or assumed liability for payment to the insured. It does not limit the ability to settle an action of a plaintiff who has not claimed (and may never claim) against the insurer. To allow an insurer who had no interest at the time to contest the validity of the limits agreement years after the settlement would contribute uncertainty to the settlement process and undermine the finality of litigation.

Cases Cited

By Iacobucci J.

Considered: Johnson v. Wunderlich (1986), 1986 2618 (ON CA), 57 O.R. (2d) 600; Chambo v. Musseau (1993), 1993 8680 (ON CA), 15 O.R. (3d) 305; DeLuca v. Motor Vehicle Accident Indemnification Corp., 215 N.E.2d 482 (1966); Wheeless v. St. Paul Fire and Marine Insurance Co., 181 S.E.2d 144 (1971); distinguished: Fogarty v. Co-operators Group Ltd., [1990] I.L.R. ¶ 1-2545; Nielsen v. Co-operators General Insurance Co. (1997), 1997 ABCA 361, 209 A.R. 177; Kraeker Estate v. Insurance Corp. of British Columbia (1992), 1992 639 (BC CA), 93 D.L.R. (4th) 431; referred to: Burns v. Ferri (1994), 1994 760 (ON CA), 16 O.R. (3d) 569; Frenette v. Metropolitan Life Insurance Co., 1992 85 (SCC), [1992] 1 S.C.R. 647; University of Saskatchewan v. Fireman’s Fund Insurance Co. of Canada (1997), 1997 9789 (SK CA), 158 Sask. R. 223; State Farm Mutual Automobile Insurance Co. v. Griffin, 286 So.2d 302 (1973); Rhault v. Tsagarakos, 361 F.Supp. 202 (1973); Glover v. Tennessee Farmers Mutual Insurance Co., 468 S.W.2d 727 (1971); Conteh v. Allstate Insurance Co., 782 A.2d 748 (2001); Non-Marine Underwriters, Lloyd’s of London v. Scalera, [2000] 1 S.C.R. 551, 2000 SCC 24; Derksen v. 539938 Ontario Ltd., [2001] 3 S.C.R. 398, 2001 SCC 72; July v. Neal (1986), 1986 149 (ON CA), 57 O.R. (2d) 129; Castellain v. Preston (1883), 11 Q.B.D. 380; A.F.G. Insurances Ltd. v. City of Brighton (1972), 126 C.L.R. 655; Pacific Coyle Navigation Co. v. Ruby General Insurance Co. (1954), 1954 448 (BC SC), 12 W.W.R. (N.S.) 715; Ontario Health Insurance Plan v. United States Fidelity and Guaranty Co. (1989), 1989 4365 (ON CA), 68 O.R. (2d) 190; Confederation Life Insurance Co. v. Causton (1989), 1989 2769 (BC CA), 38 C.C.L.I. 1; Globe & Rutgers Fire Insurance Co. v. Truedell (1927), 1927 461 (ON CA), 60 O.L.R. 227; Commercial Union Assurance Co. v. Lister (1874), L.R. 9 Ch. App. 483; Beausoleil v. Canadian General Insurance Co. (1992), 1992 8679 (ON CA), 8 O.R. (3d) 754; Puckett v. Liberty Mutual Insurance Co., 477 S.W.2d 811 (1971); Sahloff v. Western Casualty & Surety Co., 171 N.W.2d 914 (1969).

By Binnie J. (dissenting)

Guardian Assurance Co. v. Town of Chicoutimi (1915), 1915 38 (SCC), 51 S.C.R. 562; Simpson v. Thomson (1877), 3 App. Cas. 279; Kraeker Estate v. Insurance Corp. of British Columbia (1992), 1992 639 (BC CA), 93 D.L.R. (4th) 431; Nielsen v. Co-operators General Insurance Co. (1997), 1997 ABCA 361, 209 A.R. 177; Johnson v. Wunderlich (1986), 1986 2618 (ON CA), 57 O.R. (2d) 600; Chambo v. Musseau (1993), 1993 8680 (ON CA), 15 O.R. (3d) 305; July v. Neal (1986), 1986 149 (ON CA), 57 O.R. (2d) 129; Ledingham v. Ontario Hospital Services Commission, 1974 9 (SCC), [1975] 1 S.C.R. 332; Glynn v. Scottish Union & National Insurance Co., 1963 112 (ON CA), [1963] 2 O.R. 705, rev’g 1963 266 (ON SC), [1963] 1 O.R. 599; John Edwards & Co. v. Motor Union Insurance Co., [1922] 2 K.B. 249; Hobbs v. Marlowe, [1978] A.C. 16; Colonial Furniture Co. (Ottawa) Ltd. v. Saul Tanner Realty Ltd. (2001), 2001 24148 (ON CA), 52 O.R. (3d) 539; Napier v. Hunter, [1993] A.C. 713; Castellain v. Preston (1883), 11 Q.B.D. 380; Beausoleil v. Canadian General Insurance Co. (1992), 1992 8679 (ON CA), 8 O.R. (3d) 754; Fogarty v. Co-operators Group Ltd., [1990] I.L.R. ¶ 1-2545; Khederlarian v. Safeco Insurance Co., Ont. Ct. (Gen. Div.), June 16, 1992; Birtles v. Dominion of Canada General Insurance Co. (1986), 1986 ABCA 159, 46 Alta. L.R. (2d) 193; Barton v. Aitchison (1982), 1982 1843 (ON CA), 39 O.R. (2d) 282; Re Pitts Insurance Co. (1982), 44 C.B.R. (N.S.) 133; Burns v. Ferri (1994), 1994 760 (ON CA), 16 O.R. (3d) 569, rev’g (1992), 1992 7450 (ON SC), 8 O.R. (3d) 11; Transnational Insurance Co. v. Simmons, 507 P.2d 693 (1973); DeLuca v. Motor Vehicle Accident Indemnification Corp., 215 N.E.2d 482 (1966); Allstate Insurance Co. v. Skeeters, 846 F.2d 932 (1988); Biafore v. Bates-Pasis Leasing Inc. (1976), 1976 801 (ON SC), 11 O.R. (2d) 409; Toronto Hydro-Electric Commissioners v. Budget Car Rental Toronto Ltd. (1983), 1983 1821 (ON SC), 43 O.R. (2d) 539.

Statutes and Regulations Cited

Family Law Act, 1986, S.O. 1986, c. 4, s. 61.

Insurance Act, R.S.O. 1990, c. I.8, s. 278(1), (6).

Insurance Act Regulations, R.R.O. 1980, Reg. 535, s. 4(1) [now R.R.O. 1990, Reg. 676].

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 21.01.

Authors Cited

Birds’ Modern Insurance Law, 5th ed. by John Birds and Norma J. Hird. London, Sweet & Maxwell, 2001.

Brown, Craig. Insurance Law in Canada, vol. 1. Scarborough, Ont.: Carswell, 1999 (loose-leaf updated 2001, release 2).

Ivamy, E. R. Hardy. General Principles of Insurance Law, 6th ed. London: Butterworths, 1993.

Jerry, Robert H. Understanding Insurance Law, 2nd ed. New York: Matthew Bender, 1996.

MacGillivray on Insurance Law, 9th ed. by Nicholas Legh-Jones, general editor. London: Sweet and Maxwell, 1997.

Ytreberg, Dag E. “Insured’s Right to Bring Direct Action Against Insurer for Uninsured Motorist Benefits”, 73 A.L.R. 3d 632 (1976).

APPEAL from a judgment of the Ontario Court of Appeal (2000), 2000 3628 (ON CA), 183 D.L.R. (4th) 396, 129 O.A.C. 68, 17 C.C.L.I. (3d) 1, 50 M.V.R. (3d) 148, [2000] O.J. No. 401 (QL), allowing an appeal from a judgment of the Ontario Court (General Division) (1998), 1998 14857 (ON SC), 40 O.R. (3d) 461, 162 D.L.R. (4th) 229, 5 C.C.L.I. (3d) 309, 36 M.V.R. (3d) 153, [1998] I.L.R. ¶ I-3571, [1998] O.J. No. 2223 (QL). Appeal dismissed, Major and Binnie JJ. dissenting.

Brian J. E. Brock, Q.C., and Rita Bambers, for the appellant.

Jeffrey W. Strype, for the respondents.

The judgment of McLachlin C.J. and L’Heureux-Dubé, Gonthier, Iacobucci and LeBel JJ. was delivered by

Iacobucci J. –

I. Introduction

[1] I have had the benefit of reading the succinct reasons of Justice Binnie. With respect, I differ with my colleague and would dismiss the appeal. Consequently, I prefer to set forth the background of the appeal prior to discussing my reasons for disagreement with my colleague.

[2] The Somersalls were struck and injured by an underinsured motorist in 1989. They recovered as much of their damages as they could from that motorist’s insurer, and, aware that they had purchased additional coverage to protect them against just such an eventuality, sought the remainder from their own insurer. But their insurer did not wish to pay their claim. The insurer says that, by signing an agreement with the man whose negligence caused their injuries, they would not pursue him beyond his policy limits, and that the Somersalls have lost their claim and interfered with the insurer’s subrogation rights. To resolve this dispute, we must look to the rights and obligations the insurance contract between the parties sets out.

II. Background

[3] The facts can be briefly stated. On January 29, 1989, the plaintiffs Pearl and Gwendolyn Somersall (“respondents”) were injured in a car accident with the defendant Jerry Friedman. The respondents filed the statement of claim in their action on January 28, 1991. On December 13, 1991, an agreement was entered into between the respondents and the defendant Friedman, which the parties have referred to as the “Limits Agreement”. The Limits Agreement provided that (a) Friedman was to admit liability for the accident at trial; (b) the respondents would not claim against Friedman or his insurer in excess of Friedman’s policy limit of $200,000; and (c) Friedman’s insurer was to make an advance payment of $50,000 to the respondents.

[4] The co-defendant, and now appellant, was the respondents’ insurer, Scottish & York Insurance Co. Ltd. (“Scottish & York”), and was joined to this action in July 1994. The respondents sought to recover the remainder of their damages from Scottish & York pursuant to their underinsured driver coverage. This coverage existed pursuant to the Family Protection Endorsement, an optional but very common endorsement in an Ontario automobile insurance agreement, also known as the “SEF 44 Endorsement”. According to this provision, a plaintiff must be “legally entitled to recover” damages from an underinsured motorist in order to access their own insurer’s pool of coverage for such circumstances. Specifically, it obliges the insurer to:

. . . indemnify each eligible claimant for the amount that such eligible claimant is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of bodily injury or death sustained by an insured person by accident arising out of the use or operation of an automobile.

[5] The SEF 44 Endorsement is the product of Ontario’s statutory automobile insurance scheme, and the language “legally entitled to recover” is a standard phrase also in use under similar standard endorsements in most Canadian jurisdictions. It is important to note that the Ontario scheme is now quite different from the scheme by which this action is governed. The scheme governing the claim in this appeal was primarily tort-based, while the current regime generally involves first-party recovery from the insurer of the injured party, tort damages being relegated to instances of “catastrophic loss”.

[6] Scottish & York cross-claimed against Friedman. Friedman submitted in his Amended Statement of Defence to this cross-claim that the Limits Agreement bound the respondents. The appellant moved, pursuant to Rule 21.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, for determination before trial of the following question of law:

Does the agreement reached between counsel for the plaintiffs and counsel for the defendant Friedman limiting the plaintiffs’ claim to that defendant’s policy limits preclude the plaintiffs from advancing a claim against Scottish & York pursuant to the underinsured motorist provisions of its policy?

Spiegel J. ruled that the Limits Agreement did preclude the plaintiffs’ claim against Scottish & York: (1998), 1998 14857 (ON SC), 40 O.R. (3d) 461. The Ontario Court of Appeal allowed an appeal by the Somersalls and found that the Limits Agreement did not have that effect: (2000), 2000 3628 (ON CA), 183 D.L.R. (4th) 396. Scottish & York now appeals to this Court.

III. Relevant Contractual and Statutory Provisions

[7] SEF 44 Family Protection Endorsement

2. INSURING AGREEMENT

In consideration of the premium charged and subject to the provisions hereof, it is understood and agreed that the Insurer shall indemnify each eligible claimant for the amount that such eligible claimant is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of bodily injury or death sustained by an insured person by accident arising out of the use or operation of an automobile.

3. LIMIT[ATION] OF COVERAGE UNDER THIS ENDORSEMENT

(a) The Insurer’s maximum liability under this endorsement, regardless of the number of eligible claimants, or number of insured persons injured or killed, or number of automobiles insured under the policy shall be the amount by which the Limit of Family Protection Coverage exceeds the total of all limits of motor vehicle liability insurance, or bonds, or cash deposits, or other financial guarantees as required by law in lieu of such insurance, of the inadequately insured motorist and of any person jointly liable therewith;

(b) Where this endorsement applies as excess, the Insurer’s maximum liability under this endorsement is the amount determined in accordance with paragraph 3(a) less the amounts available to eligible claimants under any first loss insurance as referred to in paragraph 7 of this endorsement.

4. AMOUNT PAYABLE PER ELIGIBLE CLAIMANT

(a) The amount payable under this endorsement to any eligible claimant shall be ascertained by determining the amount of damages the eligible claimant is legally entitled to recover from the inadequately insured motorist and deducting from that amount the aggregate of the amounts referred to in paragraph 4(b), but in no event shall the Insurer be obligated to pay any amount in excess of the limit of coverage as determined under paragraph 3 of this endorsement.

(b) The amount payable under this endorsement to any eligible claimant is excess to any amount actually recovered by the eligible claimant from any source (other than money payable on death under a policy of insurance) and is excess to any amounts the eligible claimant is entitled to recover (whether such entitlement is pursued or not) from:

(i) the insurers of the inadequately insured motorist, and from bonds, cash deposits or other financial guarantees given on behalf of the inadequately insured motorist;

(ii) the insurers of any person jointly liable with the inadequately insured motorist for the damages sustained by an insured person;

(iii) the Régie de l’assurance automobile du Québec;

(iv) an unsatisfied judgment fund or similar plan or which would have been payable by such fund or plan had this endorsement not been in effect;

(v) the uninsured motorist coverage of a motor vehicle liability policy;

(vi) any automobile accident benefits plan applicable in the jurisdiction in which the accident occurred;

(vii) any policy of insurance providing disability benefits or loss of income benefits or medical expense or rehabilitation benefits;

(viii) any Worker’s Compensation Act or similar law of the jurisdiction applicable to the injury or death sustained;

(ix) any Family Protection Coverage of a motor vehicle liability policy.

5. DETERMINATION OF THE AMOUNT AN ELIGIBLE CLAIMANT IS LEGALLY ENTITLED TO RECOVER

(a) The amount that an eligible claimant is legally entitled to recover shall be determined in accordance with the procedures set forth for determination of the issues of quantum and liability by the uninsured motorist coverage provisions of the policy.

(b) In determining the amount an eligible claimant is legally entitled to recover from the inadequately insured motorist, issues of quantum shall be decided in accordance with the law of the province governing the policy and issues of liability shall be decided in accordance with the law of the place where the accident occurred.

(c) In determining any amounts an eligible claimant is legally entitled to recover, no amount shall be included with respect to pre-judgment interest accumulating prior to notice as required by this endorsement.

6. PROCEDURES

(a) The following requirements are conditions precedent to the liability of the Insurer to the eligible claimant under this endorsement:

(i) the eligible claimant shall promptly give written notice, with all available particulars, of any accident involving injury or death to an insured person and of any claim made on account of the accident,

(ii) the eligible claimant shall, if so required, provide details of any policies of insurance, other than life insurance, to which the eligible claimant may have recourse,

(iii) the eligible claimant and the insured person shall submit to examination under oath, and shall produce for examination at such reasonable place and time as is designated by the Insurer or its representative, all documents in their possession or control that relate to the matters in question, and they shall permit extracts and copies thereof to be made.

(b) Where an eligible claimant commences a legal action for damages for bodily injury or death against any other person owning or operating an automobile involved in the accident, a copy of the Writ of Summons or other initiating process shall be delivered or sent by registered mail immediately to the chief agency or head office of the Insurer in the province together with particulars of the insurance and loss.

(c) Every action or proceeding against the Insurer for recovery under this endorsement shall be commenced within 12 months from the date upon which the eligible claimant or his legal representative knew or ought to have known that the quantum of the claims with respect to an insured person exceeded the minimum limits for motor vehicle liability insurance in the jurisdiction in which the accident occurred. No action which is commenced within 2 years of the date of the accident shall be barred by this provision.

9. SUBROGATION

Where a claim is made under this endorsement, the Insurer is subrogated to the rights of the eligible claimant by whom a claim is made, and may maintain an action in the name of that person against the inadequately insured motorist and the persons referred to in paragraph 4(b).

10. ASSIGNMENT OF RIGHTS OF ACTION

Where a payment is made under this endorsement, the Insurer is entitled to receive from the eligible claimant, in consideration thereof, an assignment of all rights of action whether judgment is obtained or not, and the eligible claimant undertakes to cooperate with the Insurer, except in a pecuniary way, in the pursuit of any subrogated action or any right of action so assigned.

Insurance Act Regulations, R.R.O. 1980, Reg. 535

DETERMINATION OF LEGAL LIABILITY AND AMOUNT OF DAMAGES

4. -- (1) The determination as to whether the person insured under the contract is legally entitled to recover damages and, if so entitled, the amount thereof shall be determined,

(a) by agreement between the person insured under the contract and the insurer;

(b) at the request of the person insured under the contract, and with the consent of the insurer, by arbitration by some person to be chosen by both parties, or if they cannot agree on one person, then by two persons, one to be chosen by the person insured under the contract and the other by the insurer and a third person to be appointed by the persons so chosen; or

(c) by a court of competent jurisdiction in Ontario in an action brought against the insurer by the person insured under the contract, and unless the determination has been previously made in a contested action by a court of competent jurisdiction in Ontario, the insurer may include in its defence the determination of liability and the amount thereof.

Insurance Act, R.S.O. 1990, c. I.8

278. – (1) An insurer who makes any payment or assumes liability therefor under a contract is subrogated to all rights of recovery of the insured against any person and may bring an action in the name of the insured to enforce those rights.

(6) A settlement or release given before or after an action is brought does not bar the rights of the insured or the insurer, as the case may be, unless they have concurred therein.

IV. Issue

[8] Does the Limits Agreement entered into between the respondents and the defendant Friedman preclude the claim of the respondents for compensation under the SEF 44 Endorsement against the appellant insurer?

V. Judgments Below

A. Ontario Court (General Division) (1998), 1998 14857 (ON SC), 40 O.R. (3d) 461

[9] Spiegel J. reviewed the Ontario Court of Appeal’s decisions in Johnson v. Wunderlich (1986), 1986 2618 (ON CA), 57 O.R. (2d) 600, and Chambo v. Musseau (1993), 1993 8680 (ON CA), 15 O.R. (3d) 305. He found that they established that an insured could directly sue the SEF 44 carrier rather than having to obtain judgment against the tortfeasor in order to collect payment from the carrier under the SEF 44 Endorsement. This direct action could be brought even if the limitation period governing the action against the tortfeasor had expired. Spiegel J. distinguished actions brought despite the statutory prescription of the action against the tortfeasor from the present circumstances. Examining the case of Burns v. Ferri (1994), 1994 760 (ON CA), 16 O.R. (3d) 569 (C.A.), Spiegel J. found that an agreement between the insured and the tortfeasor purporting to release the tortfeasor from liability further than the agreed upon payment would render the insured no longer “legally entitled to recover”, and thus without remedy against the insurer. The agreement in Burns did not release the tortfeasor from liability above that which was settled by agreement. Therefore, unlike in the case of the present Limits Agreement, the insured was still at all times “legally entitled to recover” damages over and above the settlement.

[10] Thus, Spiegel J. concluded that the Limits Agreement rendered the plaintiffs no longer “legally entitled to recover” damages beyond those already recovered pursuant to that agreement. The stated question was answered in the affirmative and the action against the insurer was therefore dismissed.

B. Ontario Court of Appeal (2000), 2000 3628 (ON CA), 183 D.L.R. (4th) 396

[11] Charron J.A., for a unanimous panel, held that the question before Spiegel J., though novel, was governed by existing jurisprudence and that the motions judge was bound to answer it in the negative. He was in error in distinguishing the authorities.

[12] There was no principled reason to distinguish the interference with a legal right of action caused by a limitation period from that caused by the Limits Agreement. The principle in Johnson, repeated in Chambo, was that only fault and the quantum of damages were required to be proved by the insured in a direct action against the insurer. It was only necessary for the plaintiffs to show that Friedman was at fault in the accident, and that the damages caused by his fault exceeded his policy limits. The essence of Johnson and Chambo was that the direct right of action against the insurer did not require a prior judicial determination of liability.

[13] Charron J.A. found that even if the Limits Agreement interfered with the subrogation rights of the insurer, the insurer’s position would not be advanced, since the operation of a limitation period would have the same effect. Furthermore, although the issue was unnecessary to decide in light of the fact that Friedman was not party to the present appeal, s. 278(6) of the Insurance Act appeared to preserve the rights of the insurer in this case against him.

[14] Finally, Charron J.A. distinguished the cases from Alberta that reached the opposite result in interpreting the underinsured motorist endorsement. By contrast to the Ontario regulation governing the point, the Alberta provision considered in Fogarty v. Co-operators Group Ltd., [1990] I.L.R. ¶ 1-2545 (Alta. Q.B.), and in Nielsen v. Co-operators General Insurance Co. (1997), 1997 ABCA 361, 209 A.R. 177 (C.A.), did not allow determination of liability and quantum of damages by a court of competent jurisdiction, but only by resort to arbitration, failing agreement between the insured and the insurer.

[15] Therefore, the appeal was allowed and the stated question answered in the negative.

VI. Analysis

A. Introduction: the SEF 44 Endorsement

[16] The purpose of liability insurance generally is to spread risk among those who, as policyholders, pay premiums for this coverage. Risk was defined by L’Heureux-Dubé J., adopting the language of Malouf J.A., in Frenette v. Metropolitan Life Insurance Co., 1992 85 (SCC), [1992] 1 S.C.R. 647, at p. 668, as [translation] “a future event, certain or uncertain, which may occasion loss”. In University of Saskatchewan v. Fireman’s Fund Insurance Co. of Canada (1997), 1997 9789 (SK CA), 158 Sask. R. 223 (C.A.), Sherstobitoff J.A., at paras. 33-34, defined risk as “the peril insured against”, or “the hazard or chance of misfortune or loss at some time in the future”. He noted that “[i]f the misfortune or loss has already occurred, it is no longer a risk, but a certainty.” Thus, the insurer crafts a policy which provides the policyholders with protection against a specified risk or future peril in return for the periodic payment of a premium. To provide this protection, the insurer undertakes to be prepared to pay out to the insured up to the maximum quantum of loss that could be suffered were the risk to occur, usually set at some cap.

[17] The specific purpose of the SEF 44 Endorsement is to provide coverage, in exchange for a premium paid by the insured, for injuries sustained by the insured and eligible other occupants of the vehicle, in motor vehicle accidents caused by motorists who are not insured or whose liability limits are insufficient to compensate the injuries suffered by the claimants. Although the form of the SEF 44 is standardized, it is an optional coverage for which the premium paid is in addition to the premium paid for the coverage purchased under the standard automobile policy.

[18] The essence of this endorsement is that the insured protects himself, by making the extra payment, from the risk of being injured by an inadequately insured motorist. The insured pays a fee to the insurer to make direct compensation in the event that such an accident occurs. Since motor vehicle insurance is mandatory for all drivers in Ontario, and was at the time of the accident at issue here, this risk is, relatively speaking, small. It has been reduced further since the introduction of the generally first-party compensation system of automobile insurance in Ontario. Since the apportionment of fault is now, in most cases, a matter to be determined between the involved insurance companies, the class of inadequately insured drivers has been reduced, so far as the insured person is concerned, to those drivers who do not carry insurance at all.

[19] The clause that is most central to the present dispute is clause 2 of the SEF 44, which sets out the general conditions of the agreement. Clause 2 reads:

In consideration of the premium charged and subject to the provisions hereof, it is understood and agreed that the Insurer shall indemnify each eligible claimant for the amount that such eligible claimant is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of bodily injury or death sustained by an insured person by accident arising out of the use or operation of an automobile. [Emphasis added.]

The scope and meaning of this phrase, “legally entitled to recover”, is the first and most important issue in this appeal.

[20] The appellant has argued, in addition, that the interference by the respondents with the insurer’s right to be subrogated to the respondents’ claim against Friedman immunizes the appellant from the present action. These rights are set out in clauses 9 and 10 of the SEF 44. I will consider each of these two aspects of the case in turn.

B. The Meaning of “Legally Entitled to Recover”

[21] The SEF 44 uses the phrase “legally entitled to recover” in setting out the requirements an insured must meet to collect under the endorsement. Specifically, it provides that the insured must be legally entitled to recover damages from the inadequately insured motorist with whom the accident has occurred.

(a) The Previous Case Law in Ontario

[22] The Ontario Court of Appeal has considered the meaning of this section before and found, as Spiegel J. noted, that the statutory prescription of the underlying action against the tortfeasor will not defeat the legal entitlement of the insured to damages within the meaning of the SEF 44. In Johnson, supra, the defendant insurer was joined to an action against the defendant tortfeasor four days after the expiry of the limitation period against the tortfeasor. Morden J.A., for a majority of the court, held that the action against the insurer was a distinct action sounding in contract, and that the limitation period for such a direct action did not begin to run until the plaintiff knew or ought to have known the material facts of the cause of action against the insurer, i.e., that the tortfeasor was inadequately insured. In distinguishing the cause of action against the tortfeasor from the cause of action against the insurer, Morden J.A. considered the meaning of the words “legally entitled to recover”. He found at p. 609 that

[t]he words “legally entitled to recover” do not import a requirement that this issue must have received a prior judicial determination but, rather, simply that the person insured must establish that the uninsured or unidentified owner or driver is at fault and the amount of the damages. . . .

[23] The Ontario Court of Appeal again considered the phrase, and the conclusion of Morden J.A., in Chambo, supra. In Chambo, an action was brought by the insurer against the uninsured tortfeasor within the limitation period. A second action was then brought by the insured against the insurer and the tortfeasor together four days after the limitation had expired against the tortfeasor. The insurer asserted, in defence of the latter action, the same position that was rejected in Johnson, namely, that failure to timely pursue the tortfeasor resulted in the insured no longer being “legally entitled to recover”, and thus without remedy against the insurer as well. Osborne J.A. said (at p. 312):

It seems to me that in Johnson v. Wunderlich, Morden J.A. stated in unambiguous terms that in a direct action against the insurer, the words “legally entitled to recover damages”, in the context of the uninsured motorist coverage, require the insured person to establish only that the uninsured motorist is at fault and the amount of the insured person’s damages.

Since the limitation period against the insurer directly had not expired, the action was permitted to proceed. The fact that the tortfeasor could not be pursued directly by the plaintiff owing to the operation of limitation periods was irrelevant to the availability of the direct action against the insurer.

[24] I do not agree with my colleague Binnie J.’s view that Chambo constituted a “considerable and unjustified extension” (para. 128) of Johnson. Morden J.A. was very clear in Johnson that there might be situations in which the subrogated claim was lost, as I discuss below. While he expressed concern about this possibility, he concluded -- rightly, in my view -- that the contract required this and that it was not his place to rewrite it. The reduction of the insured’s obligation to a mere showing that she was “legally entitled to recover”, and the availability of the direct action under s. 4(1)(c) of Regulation 535, by design, result in a truncation of the process of proving a claim against the tortfeasor. There would be no practical purpose in having a direct action at all, otherwise, because an actual judicial determination of fault and damages and a corresponding award would then be the de facto requirement for recovery. Chambo, like Johnson, simply recognizes the trade-offs inherent in the relationship created by the SEF 44.

[25] In short, the law in Ontario is already clear to the extent that limitation periods are the barrier standing in the insured’s way of actually exercising a legal right to recover from the tortfeasor, but are not a barrier that prevents the insured from exercising a legal right against his or her insurer under an endorsement such as SEF 44. The novel question here is whether we should regard agreements of the type entered into in this case as barring the insured from recovery from the insurer. The parties have stipulated that the agreement in this case is not of the same type as in Burns, supra. That is, whereas in Burns the insured was found only to have released the tortfeasor from any action to collect the portion of damages he had already paid out by agreement, in this case we must suppose that the Limits Agreement commits the insured to refrain from any further legal action arising from this accident against the tortfeasor.

(b) The Relevant Time of the Inquiry

[26] The interpretation put on the words, “legally entitled to recover”, by the Ontario Court of Appeal appears to suggest that, because only fault and damages need be proven, the phrase only encompasses substantive tort law. On this approach, limitation periods and potentially the Limits Agreement, are excluded simply because the phrase intends to refer only to the substantive law of tort, not procedural laws, waivers, and whatever other specific rules, laws or contracts interfere with the actual pursuit of the tortfeasor. However, this view is seemingly incompatible with comments such as those of Charron J.A. in the present case, which indicate that “all applicable laws” govern the plaintiff’s legal entitlement to recover damages under the SEF 44.

[27] In my view, these comments get to the underlying truth of the matter. The real question is not which laws are applicable, as a matter of principle, in the determination of legal entitlement to recover damages. All laws in force that are relevant to the legal entitlement must be considered in order to determine whether the entitlement exists. The question is, rather, to what point in time we ought to look in order to make the determination. A consideration of which particular laws and obligations are in force at the relevant time will determine whether or not the plaintiff was, at the relevant time, legally entitled to recover in light of all applicable law.

[28] Clause 2 of the SEF 44 Endorsement states that “the Insurer shall indemnify [the insured] for the amount that such eligible claimant is legally entitled to recover” from the inadequately insured tortfeasor. My colleague Binnie J. stresses the present tense use in “is legally entitled to recover” and says that if there is in the present no liability on the part of the alleged tortfeasor, the insurer was not obliged to make payment. I disagree that the present tense is of such significance. The section cannot require the judge to make a moment-by-moment determination of legal entitlement. Whether he looks to the time the claim is made, the time the action is brought, or the time of the accident, the determination of legal entitlement is a retrospective exercise.

[29] Thus, it must be decided at which point in the past the inquiry must be conducted on the best reading of the contract. The language of clause 2, in my view, clearly makes the time at which the insurer becomes subject to making the indemnity payment contemporaneous with the time at which the insured must be legally entitled to recover. Whenever the insurer, under the contract, “shall indemnify”, i.e., whenever the insurer’s obligation comes into being, whatever legal entitlement there “is” at that time is the amount that the insurer must pay by way of indemnification.

[30] The question, therefore, is when the obligation to indemnify comes into being. In my view, the answer must be that the insurer becomes obliged to make the payment the moment the claim of the insured against the tortfeasor comes into being, that is, at the time of the accident. At that moment, all of the conditions set out in the SEF 44 will be satisfied; death or bodily injury has occurred, negligently caused by an inadequately insured motorist. In other words, all of the conditions necessary to make out a claim in tort against the inadequately insured driver come into being at the moment of the accident. The SEF 44 means to compensate the insured for the existence of such a claim against an inadequately insured driver. The obligation of the insurer, therefore, comes into being at the same time as the obligation of the tortfeasor to pay damages.

[31] I cannot, with respect, agree with my colleague’s view that the contract’s “plain language” shows that we must look to the time of the claim. The “legal entitlement” referred to in clause 2 does not, as my colleague suggests, refer only to the quantum of damages, but also to the question of the inadequately insured motorist’s fault. The assessment of fault, in my view, must focus on the time of the accident; there is no other time period that will assist in that determination. The right to the damages suffered crystallizes at the same time. I am also of the view that the explicit reference to the time of the claim in clause 9, stating that the insurer’s subrogation rights arise upon a claim being made, does not undergird the selection of that as the relevant time for determining legal entitlement under clause 2. Rather, by resort to the interpretive principle expressio unius est exclusio alterius, I regard that reference as supporting the view that the time of the claim was never intended to be relevant to the determination required by clause 2.

[32] When the relevant time for the determination of legal entitlement is regarded as the time of the accident, it is then true not as a matter of principle but as a proposition that will rarely, if ever, be false, that the insured will need to prove only the fault of the inadequately insured motorist, and the extent of the damages, in order to recover in a direct action against his SEF 44 insurer. In almost every case, the only relevant questions governing legal entitlement to recover at the immediate time of the accident will only be questions of substantive tort law, that is, of fault and quantum of damages. It is clear, for example, that limitation periods will not block an action against the insurer, as the Court of Appeal concluded in Johnson, supra, and confirmed in Chambo, supra, since the window in which an action can be brought against the tortfeasor can never end prior to the time of the accident itself.

[33] I must, then, reject the view very briefly expressed in the case of Nielsen, supra, that a release of the tortfeasor in exchange for his small insurance limit eliminated any excess the insured was “legally entitled to recover” under the SEF 44. Similarly, I cannot agree with the conclusion in Kraeker Estate v. Insurance Corp. of British Columbia (1992), 1992 639 (BC CA), 93 D.L.R. (4th) 431 (B.C.C.A.). In my view, leaving aside the differences between the different provinces’ standard forms, the determination in each case does not examine in adequate depth the mutual obligations created by the SEF 44. Without expressing any opinion as to its correctness, I would also distinguish the case of Fogarty, supra. That case involved a claim under the SEF 42 where a judgment had already been issued as between the insured and the tortfeasor, finding that the tortfeasor was not liable. I agree with the Court of Appeal that, since the Alberta SEF 42 does not provide for judicial determination of liability and quantum of damages, the nature of the “legally entitled to recover” requirement was not dealt with in Fogarty in a way relevant to this context.

(c) The American Cases and the SEF 44

[34] I am bolstered in my approach to the language “legally entitled to recover” by the somewhat longer history of interpretation of this phrase in various United States uninsured and underinsured motorist coverage policies. The requirement that an insured be “legally entitled to recover” from a tortfeasor in order to access underinsured or uninsured motorist coverage dates back to a standard endorsement promulgated in 1956 by the National Bureau of Casualty Underwriters. See D. E. Ytreberg, “Insured’s Right to Bring Direct Action Against Insurer for Uninsured Motorist Benefits”, 73 A.L.R. 3d 632 (1976), at § 1[a]. In the roughly 25 years between this 1956 model endorsement and its subsequent adoption, with varying details, by most U.S. states, and the 1980 appearance of the SEF 42 in Ontario, a large number of American courts had occasion to consider the relevant language. It seems to me that, given the adoption of the very language used in most American policies, it is illuminative of the intent of the drafters of the SEF 42 and 44 to consider the interpretation that had previously been placed on the phrase of art, “legally entitled to recover”.

[35] While the various U.S. states are not completely unanimous in finding that only fault and damages need be proven by the insured in order to show legal entitlement to recover, this has been the finding of the clear majority of state courts to have considered the issue. See, e.g., State Farm Mutual Automobile Insurance Co. v. Griffin, 286 So.2d 302 (Ala. Civ. App. 1973); Rhault v. Tsagarakos, 361 F. Supp. 202 (D. Vt. 1973); DeLuca v. Motor Vehicle Accident Indemnification Corp., 215 N.E.2d 482 (N.Y. 1966); Wheeless v. St. Paul Fire and Marine Insurance Co., 181 S.E.2d 144 (N.C. Ct. App. 1971); see generally Ytreberg, supra, at § 8[b]. Furthermore, in many of the states that have departed from this view, the uninsured motorist statute explicitly required judgment to be obtained against the tortfeasor prior to any action being brought against the insurer. See, e.g., Glover v. Tennessee Farmers Mutual Insurance Co., 468 S.W.2d 727 (Tenn. 1971); Conteh v. Allstate Insurance Co., 782 A.2d 748 (D.C. 2001); see generally Ytreberg, supra, at § 9. Surely the drafters of the SEF 44 were well aware of the prior, generally accepted meaning of this phrase, and would have taken pains to alter it if they meant to require that more than the substantive elements of fault and damages be proved.

[36] I note, in particular, that the courts in DeLuca, supra, and Wheeless, supra, looked explicitly to the relevant point in time in order to determine what was necessary to be made out in order to ground a direct action against the insurer. In Wheeless, the court noted that “[s]uit may be instituted when the insurer becomes obligated to pay. An insurer becomes obligated to pay under an uninsured motorist clause of a policy at the time the insured sustains damages under circumstances entitling him to recover from the owner or operator of an uninsured automobile” (pp. 146-47). In DeLuca, the court also looked to the point in time at which the insurer became obliged to pay, although it is notable that the New York regime in place explicitly provided that the obligation came into being at the moment a claim was filed, rather than the moment of the accident.

[37] In any event, the drafters of the SEF 44 could not but have been aware of the prevalent interpretation of “legally entitled to recover” as requiring only a showing of (i) fault, and (ii) damages, whether on the basis which I believe to be correct – that the agreement looks to the time of the accident to make this determination – or as a matter of policy only.

(d) Other Matters

[38] Before concluding, I would note two further divergences between the approach of Binnie J. and myself.

[39] First, my colleague states that the benefits and sums received in respect of the accident that are excluded and thus deducted from the indemnity payment owed by the insurer pursuant to clause 4(b) of the SEF 44 do not include potential recovery against the tortfeasor. While it is true that there is no pro rata amount deductible for potential recovery, I think it is important to note that clause 4(b) deducts, of course, “any amount actually recovered by the eligible claimant from any source”, in addition to the amounts the claimant can recover from the enumerated sources. Thus, the insurer need not pay the amount the plaintiffs actually recovered from Friedman. It is only when the insured recovers nothing on her own that it becomes relevant that no deduction (or addition) will be made for potential, future recovery. But that is clear enough from the existence of the subrogation clauses.

[40] Second, and with great respect for my colleague, I do not think that the question whether the insured notified the insurer of the accident promptly, as required by clause 6 of the SEF 44, has any bearing upon this appeal. No finding of fact was made on this point in the courts below. Neither party brought this to the attention of the Court in the record supplied. I do not think an assumption of fact ought to be made without the opportunity for the parties to present evidence and argue the point. In my respectful view, nothing within the corners of this appeal turns on the promptness of notification.

(e) Conclusion

[41] In this case, the Limits Agreement, like a limitation period, does not block the action. This agreement had no bearing at all on the right of the insured against the tortfeasor at the time of the accident; it did not exist at the time of the accident. It may be useful as evidence, in the plaintiffs’ favour, of the fault of the tortfeasor, as an admission of fault was part of the agreement reached. But the promise by the plaintiffs not to pursue Friedman beyond his policy limits does not have any other bearing on any question of the legal entitlement that existed on January 29, 1989, when Friedman struck the Somersalls’ automobile with his own. It only renders the plaintiffs unable to further pursue their legal rights against Friedman in the courts.

[42] This rationale and result sit comfortably with both the policy purpose and the contractual nature of underinsured and uninsured motorist coverage. The plaintiffs in this appeal are precisely within the zone which SEF 44 coverage is designed to patch over within the Ontario system of mandatory insurance. They were injured by a motorist whose insurance simply could not meet the cost of their injuries. They paid their insurer each month in order to be assured of full compensation should such an event occur. They received a small payment from Friedman and sought the remainder from their insurance policy. In my view, the terms of this policy and public policy alike support their claim.

C. Subrogation Rights

[43] The insurer briefly argues, in the alternative, that the plaintiffs have interfered with the insurer’s rights of subrogation to such an extent as to deprive the insurer of a right it acquired in the contract. The insurer says that this amounts to a breach of contract, and that the Somersalls, being the “at-fault” parties in the breach, ought not to be permitted to insist on compliance from the innocent party. My colleague Binnie J. regards this as the determinative issue in this appeal. Although it was not argued as fully as might be desired, it is an important one and is worth the time of the Court to settle. I now turn to consider the rights of subrogation set out in the SEF 44 Endorsement and whether the plaintiffs have indeed breached the contract by entering the Limits Agreement.

[44] The SEF 44 sets out the obligations of the insured with respect to subrogation at clauses 9 and 10. These clauses read:

9. SUBROGATION

Where a claim is made under this endorsement, the Insurer is subrogated to the rights of the eligible claimant by whom a claim is made, and may maintain an action in the name of that person against the inadequately insured motorist and the persons referred to in paragraph 4(b).

10. ASSIGNMENT OF RIGHTS OF ACTION

Where a payment is made under this endorsement, the Insurer is entitled to receive from the eligible claimant, in consideration thereof, an assignment of all rights of action whether judgment is obtained or not, and the eligible claimant undertakes to cooperate with the Insurer, except in a pecuniary way, in the pursuit of any subrogated action or any right of action so assigned.

[45] In order to discern whether or not the appellant has a right with which the respondents have interfered by signing the Limits Agreement, there are, in my view, four major points to keep in mind. First, we must of course consider the plain language of the contract. Second, and in relation to the first step, we must consider the special principles of interpretation and the general principles of law applicable to insurance contracts. Third, we must have regard to the views of other courts, in particular with an eye to maintaining a consistency of approach in the law. Finally, in an insurance contract like this one, promulgated by the public regulators at the Insurance Commission, we must pay heed to the wisdom of the policy that will result from whatever interpretation of the subrogation clauses is adopted.

(a) Applicable Principles of Insurance Law

[46] Although the language of a contract is always the first and most important matter to be examined in interpreting its terms, I prefer to preface this by recalling the applicable principles of insurance law, both interpretive and substantive.

[47] The applicable principle of interpretation is that we interpret insurance contracts contra proferentem, or in favour of the insured. In Non-Marine Underwriters, Lloyd’s of London v. Scalera, [2000] 1 S.C.R. 551, 2000 SCC 24, at para. 70, in comments reaffirmed in Derksen v. 539938 Ontario Ltd., [2001] 3 S.C.R. 398, 2001 SCC 72, the Court said:

Since insurance contracts are essentially adhesionary, the standard practice is to construe ambiguities against the insurer. . . . A corollary of this principle is that “coverage provisions should be construed broadly and exclusion clauses narrowly”. . . . Therefore one must always be alert to the unequal bargaining power at work in insurance contracts, and interpret such policies accordingly.

See also July v. Neal (1986), 1986 149 (ON CA), 57 O.R. (2d) 129 (C.A.). There is little doubt that this is an adhesionary contract. The insurance industry was intimately involved in the development of the SEF 42 and subsequently the SEF 44, while the insured was simply presented with the standard endorsement on a “take it or leave it” basis.

[48] Therefore, if we find that there is any ambiguity in the subrogation clauses as to whether or not the insurer has a right that the Limits Agreement could have interfered with, such an ambiguity must be resolved in favour of the insured. In other words, only a clear and unambiguous obligation upon the insured to maintain a claim in tort and not waive it in exchange for a payment, can, in my view, support an interpretation favourable to the appellant.

[49] In addition to this principle of interpretation, there are a number of relevant substantive principles.

[50] First, it is important to keep in mind the underlying objectives of the doctrine of subrogation which are to ensure (i) that the insured receives no more and no less than a full indemnity, and (ii) that the loss falls on the person who is legally responsible for causing it: see Birds’ Modern Insurance Law (5th ed. 2001), at pp. 289-90; R. H. Jerry, Understanding Insurance Law (2nd ed. 1996), at p. 602. The doctrine of subrogation operates to ensure that the insured received only a just indemnity and does not profit from the insurance: see Castellain v. Preston (1883), 11 Q.B.D. 380 (C.A.), at pp. 386-87; A.F.G. Insurances Ltd. v. City of Brighton (1972), 126 C.L.R. 655 (H.C. Aus.); C. Brown, Insurance Law in Canada (loose-leaf), at p. 13-1; E. R. H. Ivamy, General Principles of Insurance Law (6th ed. 1993), at p. 494; MacGillivray on Insurance Law (9th ed. 1997), at p. 531. Consequently, if there is no danger of the insured’s being over compensated and the tortfeasor has exhausted his or her capacity to compensate the insured there is no reason to invoke subrogation. Similarly, if the insured enters into a limits agreement or otherwise abandons his or her claim against an impecunious tortfeasor the insurer has lost nothing by the inability to be subrogated.

[51] In this case, there is no danger that the insured parties will be overcompensated by payment on the policy in addition to the $200,000 received in the settlement. If the appellant pays out the difference between what the insureds recovered from the tortfeasor and the loss the respondents actually suffered, the respondents will only receive a full indemnity; the respondents will not be overcompensated. Likewise, while the evidence on this point is perhaps not as clear as one might prefer, it also appears that the Limits Agreement exhausted Friedman’s capacity to compensate the respondents. As this is consistent with the widely held view, which I will discuss more fully below, that subrogation rights are of near-negligible value to insurers generally, it seems to me that the right of subrogation is of no value to the appellants. The objectives that the doctrine of subrogation are intended to advance are not prejudiced by the appellant’s inability to be subrogated.

[52] That the appellant appears to have suffered no real loss as a result of its inability to be subrogated supports the conclusion that the appellant’s appeal should be dismissed. Absent any evidence of actual or probable loss, insurers should not be allowed to raise an alleged breach of subrogation rights in order to bar a claim made in good faith by the insured. It would be impossible to reconcile barring a claim on such grounds with the nature of insurance policies as good faith contracts. Equitable relief for technical breaches of subrogation rights is both a well-established part of the law of subrogation and consistent with the nature of indemnity insurance as a good faith contract designed to ensure that the insured is compensated when the insured-against hazard occurs.

[53] Second, it has long been the law, in the absence of contractual terms to the contrary, that the insurer’s right of subrogation will not arise until the insured has been fully indemnified: Pacific Coyle Navigation Co. v. Ruby General Insurance Co. (1954), 1954 448 (BC SC), 12 W.W.R. (N.S.) 715 (B.C.S.C.); Ontario Health Insurance Plan v. United States Fidelity and Guaranty Co. (1989), 1989 4365 (ON CA), 68 O.R. (2d) 190 (C.A.); Confederation Life Insurance Co. v. Causton (1989), 1989 2769 (BC CA), 38 C.C.L.I. 1 (B.C.C.A.). The insurer may not control the process of litigation until this full indemnity has been met: Globe & Rutgers Fire Insurance Co. v. Truedell (1927), 1927 461 (ON CA), 60 O.L.R. 227 (S.C., App. Div.). Thus, in equity, Scottish & York would not yet be entitled to assert or pursue a subrogated claim in this case since they have not indemnified the insured fully.

[54] Third, the insured is obliged to pursue any claim it has against a third party, up until such time as the insurer is entitled to and does assert control of the claim, in good faith: Commercial Union Assurance Co. v. Lister (1874), L.R. 9 Ch. App. 483; Globe & Rutgers, supra. In Globe & Rutgers, the Ontario Court of Appeal applied the rule by asking whether the insured took from the third party less than, considering the possibility of not establishing liability and the chances and expenses involved in litigation, he honestly and in good faith thought it wise and prudent to accept. This requirement does not impose upon a policyholder an obligation actually to obtain the best deal that he or she could have obtained. Rather, so long as the respondents genuinely believed that entering into the Limits Agreement was a wise and prudent thing to have done they must be regarded as having acted in good faith. That it cannot be said with absolute certainty that there was not some small amount yet to be had does not, in and of itself, support an inference that the respondents did not act honestly and in good faith.

[55] Thus, were we to simply apply the equitable law of subrogation to this situation, I would be prepared to conclude that the Limits Agreement does not affect Scottish & York’s rights. The appellant’s right of subrogation has not yet arisen, and in any event, there is no evidence that the respondents did not honestly and in good faith believe that it was prudent and wise to enter into the Limits Agreement. However, as this right of subrogation is governed by a contract, I must now turn to the contract’s own language, while keeping in mind these principles as background to the rights thereby created.

(b) Language of the Contract

[56] Equitable insurance principles of subrogation, though not the principle of interpretation contra proferentem, may be altered by the terms of the contract between the parties.

[57] Clause 9 of this contract provides that, upon the making of a claim by the insured under the SEF 44 coverage, the insurer (a) “is subrogated” to the insured’s rights, and (b) “may maintain” an action in that person’s name. This clause sets out, in the first place, the relationship between the insurer’s rights and the claimant’s right as identical upon the making of a claim. In the second place, it permits the insurer to maintain whatever action exists at law as a result of this identity of rights between insurer and insured. What it does not appear to do is impose any obligation upon the insured to himself maintain or preserve the viability of that action. In fact, nowhere in clause 9 is there language that could reasonably appear to impose any obligation upon the insured at all. The subject of the entire clause is the insurer.

[58] Having noted that, this clause clearly means to avoid part of the common law status quo and its embodiment, in the present context, in s. 278(1) of the Insurance Act. By making the subrogation right of the insurer contingent upon the making of a claim, the requirement of indemnity is clearly meant to be waived. The insurer need not wait until it has agreed to cover the insured’s damages before asserting its subrogation rights and directing an action in the name of the insured. It may begin as soon as the insured makes the claim.

[59] At the same time, it is also clear that the insurer’s right of subrogation is not required to be exercised, and that the insured may herself maintain the right of action until such time as the insurer assumes control. The insurer “may maintain” an action in the insured’s name. Thus, if the insured were to bring an action, even while the insurer is processing the claim, and recover successfully, the insurer would not be able to claim any interference with its subrogation rights. The situation is no different in respect of reaching a settlement such as the Limits Agreement. So long as the insured acts in the good faith equity requires of him, the insurer cannot complain of the insured’s own diligence in speedily and successfully resolving the underlying dispute.

[60] Clause 10 makes provision for the assignment of rights of action, rather than subrogation, at the time payment is made by the insurer. The provision is evidently intended to provide for a straight transfer of the right where neither the insurer nor the insured has pursued the claim prior to satisfactory indemnification. The insurer is entitled under this clause, in consideration for the indemnity payment made, to an “assignment of all rights of action whether judgment is obtained or not”. The insured is further required by this clause to undertake to cooperate with the insurer in pursuing such assigned actions. Again, nothing in the plain language of clause 10 puts any obligation on the insured to maintain the viability of the action, let alone to pursue it to judgment, as is made clear from the proviso “whether judgment is obtained or not”. The entitlement of the insurer is to whatever cause of action the insured may have in respect of the accident. The insurer’s entitlement to an assignment of such causes of action is not affected by the fact that such actions are not, in fact, able to be pursued successfully. In other words, the insured may be obliged to pass along whatever she has, but this obligation is still met when what she has is nothing.

[61] The only obligation that is clearly placed upon the insured in either of these clauses is the requirement that the insured “cooperate with the Insurer, except in a pecuniary way”, in the pursuit of the action. I am again not persuaded that this can be regarded as requiring the insured to maintain the action’s viability. In the first place, the insured is not required to cooperate until a payment has been made. Since, in this case, no payment has yet been made, the insured is not bound by this provision at all. To view this breach of this obligation as creating a bar to payment when the payment is itself a condition precedent to the obligation arising makes no sense.

[62] Secondly, once a payment has been made, it seems to me that the actions of the insured prior to that payment being made cannot conflict with her undertaking to cooperate from the time of the payment forward. If no action remains to be pursued, obviously the ccoperation of the insured will, in practical terms, mean very little. But that is simply the nature of the undertaking set out by the parties to this contract.

[63] Thirdly, if this requirement were to be interpreted so as to allow the insurer to refuse payment because of non-cooperation simply on the basis that the action is no longer available, the insurer could avoid payment merely by refusing to make a payment until the action against the tortfeasor expired by prescription. It seems to me that such a change in the relationship between insurer and insured ought to be accomplished with the participation of the Superintendent of Insurance.

[64] Finally, even if there is an ambiguity in the content of the obligation to “cooperate”, the accepted principle of interpretation contra proferentem would, as discussed above, demand that we resolve it in favour of the insured. Cooperation in the pursuit of the action, especially in light of the proviso that the insured need not ccoperate “in a pecuniary way”, appears to be intended primarily to ensure that the insured will provide testimony in a subrogated action. Although I do not wish to be conclusive with respect to what exactly might be required, I would restrict the content of “cooperation” to the reasonable intent of the parties in light of a contra proferentem interpretation, and find that little more than actual participation as a witness in the assigned action is required by this clause.

[65] Therefore, it is my view that the plain language of the contract does not support a finding that the Limits Agreement interfered with a contractual right of the appellant. Any lingering doubt over this should be dispelled by bearing in mind the principle contra proferentem.

(c) Precedent

[66] Although it is always open to this Court to reject the interpretations of statutes (and statutory contracts) adopted by lower courts, it is also incumbent upon us to pay heed to their thoughtful views and to participate in creating a consistent approach to the areas of law these courts work with every day. The courts below have not yet fully canvassed the nature of the subrogation rights contained in the SEF 44. However, I would still make a couple of observations with a view to maintaining the desired harmony of approach.

[67] In the first place, the potential interference with subrogation rights was noticed as far back as in Johnson, supra, by Morden J.A., who said (at p. 608):

The reservation that I expressed about [the existence of a direct action against the insurer] is primarily based on the concern that a claim confined to the direct-action route could result in the insurer’s subrogation rights being frustrated . . . as well as the insurer’s inability to confine its liability to the balance of what is owed on a judgment obtained against the tortfeasor. . . . If, however, my interpretation, and apparently that of the parties, does not reflect the intention of the drafters the necessary correction lies close to hand in the form of an amendment to Reg. 535.

This statement was made in 1986, and to date no amendments have been made to either Regulation 535 (now R.R.O. 1990, Reg. 676) nor to the standard endorsements that suggest that the occasional loss of subrogation rights has been addressed. It was repeated by Grange J.A. in Beausoleil v. Canadian General Insurance Co. (1992), 1992 8679 (ON CA), 8 O.R. (3d) 754 (C.A.), at p. 760, with respect to the SEF 42. Given this lack of response, I am ever more reluctant to alter the status quo, apparently accepted by the industry and by the Superintendent of Insurance. We should not, in my view, second-guess the conclusions of these courts on the language of the contract in light of a question of pure policy, though such a problem may be of concern to the Superintendent of Insurance.

[68] Second, a finding that the Limits Agreement somehow interferes with the right of subrogation to such an extent as to nullify the right of the insured to indemnity would seriously undermine the central holding in Johnson -- that the direct action against the insurer exists at all. The essence of Johnson was, of course, that an insured was not required to bring an action through to judgment, nor even maintain its viability in the face of a limitation period, in order to collect an indemnity payment under the SEF 44. If an insured interferes with the subrogation right by signing a Limits Agreement, how can this be distinguished from the interference with subrogation rights that would be occasioned by allowing a limitation period to expire? In either case, the action or inaction of the insured results in the insurer being deprived of the potential value of the subrogated tort claim. It seems to me that finding the endangerment of the subrogation right by the Limits Agreement sufficient to bar a claim under the SEF 44, would provide a back route away from allowing the direct action at all. I am inclined to agree with Morden J.A. that the proper route for eliminating the direct action, even if that were desirable, would be by an amendment to the regulation, not by the adoption of a new interpretation of the subrogation clauses.

[69] To say it simply, the insurer is advocating quite a new approach to the understanding of the SEF 44 when it -- albeit briefly -- makes its subrogation argument. Quite apart from my views on the plain language of the contract, I am reluctant to alter the state of the law as set out by Morden J.A.

(d) Public Policy

[70] Finally, I find it worthwhile to consider the policy results of this conclusion as opposed to the contrary.

[71] The appellant, particularly through an affidavit submitted from the Insurance Council of Canada, stressed the allegedly drastic effects that could be expected to visit the industry if a result contrary to the appellant’s position were reached. The fact of the matter is, however, that subrogation rights against underinsured or uninsured drivers are rarely very valuable at all. As C. Brown has noted in Insurance Law in Canada, supra, at para. 13.7, p. 13-30, in the wider context, “[m]ost observers consider the cost-saving rationale of subrogation to be insignificant at best and that, in fact, a successful recovery in a subrogation claim is really a windfall for an insurer”. The limited real value of the subrogation right has been noted to be particularly true in the case of inadequately insured motorists by some of the American courts. See Puckett v. Liberty Mutual Insurance Co., 477 S.W.2d 811 (Ky. Ct. App. 1971); Sahloff v. Western Casualty & Surety Co., 171 N.W.2d 914 (Wis. 1969). Leaving the rules of interpretation aside, there is no good policy reason for this Court to read into the contract a provision that will so gravely prejudice the insured when the insurer will likely gain little but an exemption from the very payment for which the insured has faithfully paid her monthly premiums to ensure entitlement.

[72] In view of the near-negligible value of the subrogation right, it would be overreaching, in my view, to regard its loss as significantly changing the insurer’s position. The risk that the insurer has assumed is effectively compensated for by the insured’s monthly premium. Without being cynical, I would be very surprised indeed if the loss of a subrogation right with little practical value were significant enough to have any effect whatever upon the insurer’s balance sheet. The insurer is free to set premiums at such a level as to ensure that its risk is covered, exclusive of the anticipated value of subrogation rights, and I would cautiously presume that this is precisely what it has done.

[73] The value of the indemnity payment, by contrast, is of great significance to the insured. It is clear enough that the insured valued the availability of such payment highly enough to pay a substantial increase in monthly premiums for it. It is also clear that the insurer would rather not make the payment, to the extent of pursuing the case all the way to this Court. The result of finding for the appellant in this case upon the insurance industry at large will not be to restore or confirm the value of lost subrogation rights. It will be to release insurers from paying out the rather more substantial amounts to which subscribers to the SEF 44 Endorsement would otherwise be entitled.

[74] The insurer is entitled to the rights acquired by contract as much as any natural person. But it would be foolhardy to disregard the common sense results of an interpretation of a contract that would grant the insurer a windfall in escaping its presumed obligations while depriving the insured of the amount she would have expected to have been paid to her in the normal course of business. I am convinced that the interpretation here adopted is not only the most natural view of the terms of the contract, but sound and equitable public policy as well. A policy that recognizes the relative value of a subrogation right to an insurer and of an indemnity payment to an insured person is what one would expect the Superintendent of Insurance to attempt to formulate and adopt. In my view, that is what has been done in the SEF 44.

D. Other Matters

[75] I am fully in agreement with my colleague Binnie J. on the question of the applicability of s. 278(6) of the Insurance Act. The provision cannot assist the insurer because it has neither made any payment nor assumed any liability therefor as required by s. 278(1) of the Act.

[76] I should note that the parties did not argue the issue of forfeiture or relief therefrom, and accordingly these reasons do not address that question.

VII. Conclusion

[77] For these reasons, I am of the view that the question stated by the parties ought to be answered in the negative. The respondents are entitled to pursue their action against the insurer for recovery of the indemnity payment owing under their SEF 44 policy, notwithstanding the Limits Agreement. To meet their case, they must show that the defendant Friedman was at fault and prove the quantum of damages. Accordingly, I would dismiss the appeal with costs.

The reasons of Major and Binnie JJ. were delivered by

[78] Binnie J. (dissenting) -- An insurance policy to cover an actual provable loss against a specified risk is a contract of indemnity which rests on the “well known principle of law, that where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss” (emphasis added) (Guardian Assurance Co. v. Town of Chicoutimi (1915), 1915 38 (SCC), 51 S.C.R. 562, per Fitzpatrick C.J., at p. 564, citing Simpson v. Thomson (1877), 3 App. Cas. 279 (H.L.), per Lord Cairns, at p. 284). A majority of my colleagues conclude that this fundamental principle of insurance law has no application to the underinsured motorist coverage of an Ontario Standard Automobile Policy (SEF 44), despite the fact that SEF 44 itself refers to rights of subrogation. With respect, I am unable to agree.

[79] In this case the respondents, having suffered actual loss as a result of a motor vehicle accident caused by an inadequately insured motorist, one Jerry Friedman, seek to recover from their own insurer, the appellant, the amount of their damages over and above the $200,000 in liability coverage Friedman carried. However, without the appellant insurer’s knowledge or consent, they released Friedman from all claims over and above his $200,000 insurance coverage, thus depriving the appellant insurer of the opportunity to try to reimburse itself from Friedman’s other assets by “all the ways and means by which the person indemnified might have protected himself or reimbursed himself for the loss” (Guardian Assurance Co., supra). The appellant insurer therefore denied the claim.

[80] The Ontario Court of Appeal concluded that this release did not justify the appellant’s refusal to pay. The decision would likely have been different under similar “inadequately insured” motorist policies in at least two other provinces, British Columbia and Alberta: see Kraeker Estate v. Insurance Corp. of British Columbia (1992), 1992 639 (BC CA), 93 D.L.R. (4th) 431 (B.C.C.A.), and Nielsen v. Co-operators General Insurance Co. (1997), 1997 ABCA 361, 209 A.R. 177 (C.A.).

[81] In my view, the insurer was entitled to deny the claim. The respondents’ release of Friedman from the very claim they now wish to assert against the appellant insurer was not consistent with a fundamental term of their policy. I would allow the appeal.

[82] It should be noted that the respondents released Friedman after they became aware of the inadequacy of his coverage, when it must have been apparent to them that they would be looking to the appellant insurer to indemnify them against the shortfall.

I. The Facts

[83] The respondents Pearl Somersall and her mother Gwendolyn Somersall suffered serious injuries in a motor vehicle collision on January 29, 1989. (The record does not explain why it has taken more than 12 years for the case to reach this Court on a preliminary motion.) An action was commenced against the driver of the other motor vehicle, Friedman, in good time. The respondent Janice Somersall is Gwendolyn’s daughter and sued on her own behalf and on behalf of the other claimants under s. 61 of the Family Law Act, 1986, S.O. 1986, c. 4.

[84] No later than October 21, 1991, the respondents discovered that Friedman’s third party liability insurance was only $200,000, which they considered to be substantially less than their actual loss.

[85] On December 13, 1991, with knowledge of the shortfall and without notice to the appellant insurer, the respondents entered into a written agreement (“the Limits Agreement”) with Friedman on the following terms:

(i) Friedman would admit liability for the accident at trial;

(ii) the respondents would not make any claim against Friedman or his insurer in excess of Friedman’s insurance policy limits of $200,000; and

(iii) Friedman’s insurer would (and did) make an advance payment of $50,000 to the respondents.

[86] The assertion of my colleague, Justice Iacobucci, at para. 51 that “the Limits Agreement exhausted Friedman’s capacity to compensate” may be true. It may not be true. We were provided with no facts one way or the other. More importantly, the insurer was never given the opportunity to assess the ability of the wrongdoer to contribute to the settlement from his personal assets, whatever they may be.

[87] Two and a half years later, on July 4, 1994, the respondents added their own insurer, the appellant, as a defendant to the action. The appellant filed a defence to the action and brought a motion to dismiss the action against it on a point of law. Counsel for the insurer of the respondents’ original solicitor, who had negotiated the Limits Agreement, opposed the motion on behalf of the respondents. This is thus a battle between insurance companies.

II. Judicial History

[88] The motions judge, Spiegel J., gave effect to the appellant’s contention and on June 4, 1998, dismissed the action as against it: (1998), 1998 14857 (ON SC), 40 O.R. (3d) 461. This was reversed on February 16, 2000 by the Ontario Court of Appeal per Charron J.A. ((2000), 2000 3628 (ON CA), 183 D.L.R. (4th) 396) who concluded that the point had been decided adversely to the insurer by that court’s previous rulings in Johnson v. Wunderlich (1986), 1986 2618 (ON CA), 57 O.R. (2d) 600, and Chambo v. Musseau (1993), 1993 8680 (ON CA), 15 O.R. (3d) 305.

III. SEF 44

[89] The terms of SEF 44 are set out in the judgment of my colleague, Iacobucci J. I will therefore content myself by quoting the relevant extracts as and when necessary.

IV. Analysis

[90] The language of motor vehicle insurance policies is generally regulated in each of the provinces. The insurance industry is consulted. The individual insured is not. I accept the interpretive approach proposed by MacKinnon A.C.J.O. in July v. Neal (1986), 1986 149 (ON CA), 57 O.R. (2d) 129 (C.A.), at p. 135:

It appears to me that if there is doubt in the legislation establishing and governing the cover, and there are two possible interpretations of any aspect of the cover, the one more favourable to the insured should govern.

[91] That said, we are still obliged to apply the text of SEF 44 as we find it. With due respect for those who hold a contrary view, I interpret the language of the policy as clearly requiring the insured to refrain from acts destructive of the subrogation interest of their insurer. The language of SEF 44, in my view, is not ambiguous. Having signed away their claim against Friedman, the respondents are precluded from recovering what they thus signed away from the appellant.

[92] The appellant has also raised in its Statement of Defence the failure of the respondents to commence an action within 12 months of the time they knew or ought to have known that their claims against Friedman exceeded the $200,000 minimum coverage (clause 6(c)). That issue is not before us for decision.

A. Inadequately Insured Driver Coverage

[93] The respondents purchased “uninsured or underinsured motorist coverage” for an additional premium against the risk of involvement in a motor vehicle accident caused by the fault of an underinsured or uninsured driver. The appellant insurance company undertook, on specific conditions, to step in and pay the excess damages within the policy limits. The special coverage is provided in SEF 44 whose wording was negotiated by the insurance industry with, and approved by, the Superintendent of Insurance in Ontario. The relevant coverage is expressed in clause 2 of SEF 44 as follows:

2. INSURING AGREEMENT

In consideration of the premium charged and subject to the provisions hereof, it is understood and agreed that the Insurer shall indemnify each eligible claimant for the amount that such eligible claimant is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of bodily injury or death sustained by an insured person by accident arising out of the use or operation of an automobile. [Emphasis added.]

[94] On its face, the plain text requires that at the time the claim is asserted there be a subsisting right of action against the tortfeasor (i.e., “is legally entitled”). It provides that the legal entitlement must subsist as between the insured and the tortfeasor at the time the claim is made. This is consistent with the reciprocal nature of this insurance as a contract of indemnity with the concomitant expectation of subrogation.

[95] This interpretation is refined by clause 9, which subrogates the insurer to “the rights of the eligible claimant” and authorizes the insurer to “maintain an action in the name of that person against the inadequately insured motorist”. In my view, the expression “is legally entitled to recover” in clause 2, imposing on the insurer the obligation to pay, corresponds to the subsisting cause of action, i.e., “the rights of the eligible claimant” referred to in clause 9, authorizing the insurer to attempt to recover its payment from the tortfeasor. The two provisions must be read together.

[96] The respondents seem to accept that the expression “is legally entitled to recover” means what it says but argue that it is sufficient if at the time of the accident there was a subsisting right of action. However, the requirement of a legal entitlement is not framed in the past tense. This reflects the underlying reciprocity of the arrangement. In Kraeker Estate, supra, Goldie J.A. said, at p. 434, “I think ‘legally entitled to recover damages’ means ‘has a right of action for damages’”. To the same effect see Côté J.A. in Nielsen, supra, at para. 2. As of the date of their claim against the appellant, the respondents had voluntarily parted with their ability to recover from the tortfeasor the sum claimed, i.e., their alleged loss in excess of $200,000. They had no “legal entitlement”.

[97] I do not put much importance on the fact the respondents signed a Limits Agreement rather than a release of the cause of action. In either case, the insurer is precluded from a successful claim over. Subrogation is a matter of substance not form: Ledingham v. Ontario Hospital Services Commission, 1974 9 (SCC), [1975] 1 S.C.R. 332, per Judson J., at p. 337.

[98] From a practical point of view, it does not follow from the fact an individual carries inadequate third party insurance that he or she is without personal assets to satisfy in whole or in part a judgment in excess of those limits. An uninsured rich man can cause an accident while driving a poor man’s car. It cannot be said that just because the motorist is uninsured there is no monetary value to the right of subrogation. One can assume, I think, that the respondents would have pursued Friedman’s personal assets if the choice had been to do that or absorb the loss themselves.

[99] In paras. 50 to 55, my colleague Iacobucci J. relies on an assumption that Friedman is impecunious. Quite apart from the speculative nature of the assumption, this case is about the proper interpretation of SEF 44, and the result will enure to the benefit of the rich tortfeasor as well as to the putatively impecunious tortfeasor. If there is no obligation on insured persons to keep alive enforceable legal rights against a tortfeasor (rich or poor), they will see no advantage to themselves in doing so.

[100] The limitations on the coverage granted by clause 2, clear in themselves, are reinforced by the other provisions of SEF 44, read as a whole, which specifically address the issue of subrogation and cooperation. My colleague writes at para. 55 that “there is no evidence that the respondents did not honestly and in good faith believe that it was prudent and wise to enter into the Limits Agreement”. If the appellant insurer is to be called on to pay the excess claim, the decision whether it is “prudent and wise” to seek or not to seek further recovery from Friedman is properly for the insurer to make. The respondents, looking to be indemnified by their own insurer, have little financial stake in such a decision, which is why they should not make it unilaterally.

B. Calculation of the Claim

[101] The sum payable by way of indemnity is set out in clause 4(b) of SEF 44 which provides in part as follows:

(b) The amount payable under this endorsement to any eligible claimant is excess to any amount actually recovered by the eligible claimant from any source (other than money payable on death under a policy of insurance) and is excess to any amounts the eligible claimant is entitled to recover (whether such entitlement is pursued or not) from. . . . [Emphasis added.]

There follows a list of potential sources of benefits including other insurance coverage, unsatisfied judgment funds, accident benefit plans (including the Régie de l’assurance automobile du Québec) and Workers’ Compensation Act benefits. If these benefits are available, they will be deducted from the excess coverage “whether such entitlement is pursued or not”.

[102] Potential recovery against the tortfeasor, of course, is not excluded. That is the subject matter of the risk. The insurer can be called upon to pay that amount but if so, it should not be fatally prejudiced from doing what it can to recuperate its payment from the wrongdoer ultimately responsible.

[103] In my view, the risk undertaken by the appellant was not the whole of the respondents’ loss but the loss reduced (at least potentially) by assigning to the insurer all proper and available means of reimbursement.

C. Indemnity and Subrogation

[104] That the present policy is a policy of indemnity is, I think, clearly supported by the analysis adopted by Spence J., then of the Ontario High Court, in Glynn v. Scottish Union & National Insurance Co., 1963 266 (ON SC), [1963] 1 O.R. 599, at p. 602 (citing Halsbury’s Laws of England (3rd ed. 1952), vol. 22, at pp. 180-81):

Most contracts of insurance [other than life insurance] belong to the general category of contracts of indemnity, in the sense that the liability of the insurers is limited to the actual loss which is in fact proved.

On appeal at 1963 112 (ON CA), [1963] 2 O.R. 705, at p. 717, Kelly J.A. stated:

In view of the interpretation I place upon the insuring agreement, namely, that it is a contract of indemnity, the doctrine of subrogation would apply as an incident to that contract being one of indemnity, and it would be unnecessary for the contract to contain a specific subrogation provision. . . .

[105] The importance of subrogation in SEF 44, specifically, is reflected in clauses 9 and 10 which for ease of reference I reproduce:

9. SUBROGATION

Where a claim is made under this endorsement, the Insurer is subrogated to the rights of the eligible claimant by whom a claim is made, and may maintain an action in the name of that person against the inadequately insured motorist and the persons referred to in paragraph 4(b).

10. ASSIGNMENT OF RIGHTS OF ACTION

Where a payment is made under this endorsement, the Insurer is entitled to receive from the eligible claimant, in consideration thereof, an assignment of all rights of action whether judgment is obtained or not, and the eligible claimant undertakes to cooperate with the Insurer, except in a pecuniary way, in the pursuit of any subrogated action or any right of action so assigned.

[106] Somewhat unusually, the right of subrogation under clause 9 arises as soon as the insured makes a claim. Generally, under s. 278(1) of the Insurance Act, R.S.O. 1990, c. I.8, a right of subrogation arises only when the insurer “makes any payment or assumes liability therefor”. The accelerated rights under clause 9 signal the importance placed on the right of subrogation in general, and in particular on putting the insurer in charge of the claim over against the tortfeasor at the earliest practicable date. The duty of cooperation, which arises on payment, presupposes that the insurer at that time has carriage of the proceedings. All of this is inconsistent, in my view, with the view taken by the Court of Appeal in this case that the respondents’ voluntary destruction of the potential subrogation interest had no adverse effect on their right to claim full indemnity under their insurance policy.

[107] This conclusion, based on interpreting SEF 44 of the contract, is reinforced by the fundamental nature of indemnity insurance, a concept learnedly discussed by Kelly J.A. in Glynn, supra, at pp. 710 et seq.

[108] Subrogation has deep roots in the law of insurance, reaching back, it seems, to Roman times: John Edwards & Co. v. Motor Union Insurance Co., [1922] 2 K.B. 249, at p. 252. It is now sometimes attributed to general common law principles: Hobbs v. Marlowe, [1978] A.C. 16 (H.L.), per Lord Diplock, at p. 39, but, more usually to doctrines of equity: Ledingham, supra, at pp. 336-37; Colonial Furniture Co. (Ottawa) Ltd. v. Saul Tanner Realty Ltd. (2001), 2001 24148 (ON CA), 52 O.R. (3d) 539 (C.A.), at para. 19; Napier v. Hunter, [1993] A.C. 713 (H.L.). One of the leading judgments regarding its scope is that of Brett L.J. in Castellain v. Preston (1883), 11 Q.B.D. 380 (C.A.), whose words (at pp. 388-89) were approved and applied by Idington J. of this Court in Guardian Assurance, supra, at p. 571:

Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished. [Emphasis added.]

Brett L.J., in the original, added the following:

That seems to me to put this doctrine of subrogation in the largest possible form, and if in that form, large as it is, it is short of fulfilling that which is the fundamental condition, I must have omitted to state something which ought to have been stated. But it will be observed that I use the words “of every right of the assured.” I think that the rule does require that limit.

[109] The passage quoted by Idington J. was more recently cited with approval by the House of Lords in Napier, supra, in the leading opinion of Lord Templeman at p. 734.

[110] In Johnson, supra, one of the decisions principally relied upon in this case by the Ontario Court of Appeal, I note that potential impact of his decision on rights of subrogation was one of the concerns expressed in the majority judgment of Morden J.A. at p. 608:

The reservation that I expressed about [direct action against the insurer] is primarily based on the concern that a claim confined to the direct-action route could result in the insurer’s subrogation rights being frustrated. . . .

In Johnson itself, the insurer’s rights of subrogation were not affected because the insured was the plaintiff in an ongoing action against the tortfeasor which had been commenced in a timely way.

[111] The concern about preservation of rights of subrogation was picked up in Beausoleil v. Canadian General Insurance Co. (1992), 1992 8679 (ON CA), 8 O.R. (3d) 754 (C.A.), where Grange J.A. noted that in that case, too, the rights of the insurer had been preserved (p. 760).

[112] The need to bring the insurer into the picture at the earliest practicable date is reflected in clause 6 of SEF 44 which requires prompt notice of the accident and any claims in respect thereof to the insurer.

[113] The foregoing analysis is, I think, consistent with the approach to inadequately insured motorist coverage taken by the Alberta Court of Appeal in Nielsen, supra, where, as here, the insured had released the tortfeasor prior to making a claim against her own insurer. Côté J.A., for the court, stated at para. 2:

Now the appellant claims against her Alberta insurer under the SEF 44 endorsement for under-insured motorists. It promises to pay such amount as the appellant insured “is legally entitled to recover” from the tortfeasor. By signing a release, she has eliminated any excess. The release limits the amount she is “legally entitled to recover”. Therefore, the order appealed from is correct, her appeal fails, and it is not necessary to pursue questions of subrogation or noncooperation.

[114] Similarly, in Fogarty v. Co-operators Group Ltd., [1990] I.L.R. ¶ 1-2545 (Alta. Q.B.), the court dismissed the claim by an insured under SEF 42 (a predecessor to SEF 44) because her claim against the tortfeasor was barred by expiry of the limitation period. To the same effect is the Ontario trial level decision of O’Leary J. in Khederlarian v. Safeco Insurance Co., Ont. Ct. (Gen. Div.), June 16, 1992, who held:

The plaintiffs are not now, “legally entitled to recover damages” from the uninsured driver. They lost that entitlement by not bringing action against him within 2 years.

[115] My colleague Iacobucci J. states at para. 50 that the underlying objectives of subrogation are “to ensure (i) that the insured receives no more and no less than a full indemnity, and (ii) that the loss falls on the person who is legally responsible for causing it”. He continues:

Consequently, if there is no danger of the insured’s being overcompensated and the tortfeasor has exhausted his or her capacity to compensate the insured there is no reason to invoke subrogation.

[116] There is not a tittle of evidence about the tortfeasor’s “capacity to compensate the insured” in this case. Nor is there any evidence that whatever capacity existed has been “exhausted”. Nor is there evidence to support my colleague’s statement in para. 52 that “the appellant appears to have suffered no real loss as a result of its inability to be subrogated”. All we know is that Friedman himself, the tortfeasor, contributed nothing out of his own pocket to the settlement. The $200,000 was contributed by his underinsurer. The approach to subrogation adopted by my colleague centres on the insured to the virtual exclusion of the concerns of the other party to the policy, the appellant insurer, and pays insufficient attention to the mutuality of the insurance contract. More curiously, it squarely contradicts my colleague’s second objective of subrogation, namely to ensure that “the loss falls on the person who is legally responsible for causing it”.

[117] My colleague suggests at para. 51 the existence of a “widely held view . . . that subrogation rights are of near-negligible value to insurers generally”. The insurance industry does not, I think, spend millions of dollars a year pursuing subrogated claims out of an academic interest in avoidance of over-compensation of insureds or a morality crusade against wrongdoers. They do so in the expectation of recovering a significant portion of their losses from wrongdoers to reduce their overall loss experience on which the calculation of premiums is ultimately based. If subrogation litigation were of “near-negligible value” the insurers, being professional in these matters, would not engage in it. A risk with recourse against the wrongdoer is different than a risk without such recourse. It is the former risk that was accepted by the appellant in this case, but it is the latter risk that is being imposed upon it by the Court’s judgment.

[118] Although the right of subrogation cannot be exercised until payment is made, it is a contingent right that vests at the time the policy is entered into: MacGillivray on Insurance Law (9th ed. 1997), at para. 22-28, p. 542; John Edwards, supra, at p. 254. My colleague contends at para. 52 that “[a]bsent any evidence of actual or probable loss, insurers should not be allowed to raise an alleged breach of subrogation rights in order to bar a claim made in good faith by the insured”. My colleague seems to suggest that proof of actual damage is a condition precedent to the insurer’s ability to consider itself relieved from performance of a reciprocal term of the contract. However, it is trite law that the breach of contract, unlike a tort, may be complete irrespective of whether damages occur or can be proven. Clause 10 of SEF 44 imposes no such condition precedent. It reads (to repeat):

Where a payment is made under this endorsement, the Insurer is entitled to receive from the eligible claimant, in consideration thereof, an assignment of all rights of action whether judgment is obtained or not, and the eligible claimant undertakes to cooperate with the Insurer, except in a pecuniary way, in the pursuit of any subrogated action or any right of action so assigned.

[119] There is nothing here that requires the insurer first to prove the tortfeasor has substantial personal assets before it is entitled to an assignment of “all rights of action”. For the Court now to add the requirement that an insurer denied subrogation must prove that the denial did in fact result in “actual or probable loss” ignores the wording of SEF 44 and introduces unnecessary uncertainty in its day-to-day application.

D. The Insured’s Right of Direct Action

[120] The Ontario Court of Appeal in this case distinguished the Alberta line of authority on the basis that Alberta’s SEF 42 did not expressly provide for a right of “direct action” by the insured against the insurer. (I note parenthetically, however, that the Alberta courts permit such a direct action as a matter of contract law prior to any judgment in tort being obtained against the wrongdoer: Birtles v. Dominion of Canada General Insurance Co. (1986), 1986 ABCA 159, 46 Alta. L.R. (2d) 193 (C.A.), at p. 204.)

[121] Ontario Regulation 535 provides for a direct action in s. 4(1)(c), as follows:

4. -- (1) The determination as to whether the person insured under the contract is legally entitled to recover damages and, if so entitled, the amount thereof shall be determined,

(a) by agreement between the person insured under the contract and the insurer;

(b) at the request of the person insured under the contract, and with the consent of the insurer, by arbitration. . . .

(c) by a court of competent jurisdiction in Ontario in an action brought against the insurer by the person insured under the contract, and unless the determination has been previously made in a contested action by a court of competent jurisdiction in Ontario, the insurer may include in its defence the determination of liability and the amount thereof. [Emphasis added.]

(Schedule to the policy prescribed by Revised Regulations of Ontario, 1980, Reg. 535 (now R.R.O. 1990, Reg. 676))

[122] Regulation 535 clearly authorizes direct action against the insurer without first proceeding to judgment against the tortfeasor: Barton v. Aitchison (1982), 1982 1843 (ON CA), 39 O.R. (2d) 282 (C.A.), at p. 287; Re Pitts Insurance Co. (1982), 44 C.B.R. (N.S.) 133 (Ont. C.A.), at p. 135. However, for the reasons previously stated, my view is that the right of the insurer to contest “liability and the amount thereof” includes the defence that the insured is not “legally entitled to recover” any further amount from the tortfeasor at the time the insurance claim is made.

[123] In Johnson, supra, the Ontario Court of Appeal rightly rejected the insurance company’s argument that a direct action must be commenced within two years of the accident. In that case the plaintiffs had initiated an action against an underinsured motorist within the two-year limitation under the Highway Traffic Act. Subsequently, after the expiry of the two-year limitation in tort, the plaintiffs purported to add their insurance company under the inadequately insured motorist endorsement. The trial judge held that the insured was required to commence action against his insurance company within the two-year tort limitation period and dismissed the action against the insurer. This was reversed by the Ontario Court of Appeal, correctly in my view, on the basis that the insured was not suing the insurer in tort but in contract and the limitation period with respect to his contractual claim did not begin to run until after all the material facts constituting its direct cause of action under SEF 44 were known to the insured.

[124] A direct claim against the insurance company, according to Morden J.A. at p. 608, is a separate cause of action, the elements of which are:

(1) a person insured (2) who is [i.e., present tense] legally entitled to recover damages from the owner or driver of (3) an uninsured or unidentified automobile. [Emphasis added.]

[125] The “cause of action accrues when the plaintiff (the person insured) has discovered these material facts or ought to have discovered them by the exercise of reasonable diligence” (Johnson, supra, at pp. 608-9). The relevant date to establish the cause of action against the insurer is the date the action is instituted against the insurer, not (despite the respondents’ argument) at the earlier date when the accident occurred. That, indeed, is the whole point of Morden J.A.’s judgment.

[126] In his concurring judgment in Johnson, supra, Finlayson J.A. is even more explicit at p. 616 that “[i]f there is no ‘legal entitlement to recover damages’ with respect to the uninsured automobile, there can be no recourse against the insurer under s. 4(1)(c) of the Schedule”. He differed from Morden J.A. only in that in his view the cause of action against the insurer did not arise until “the insurer denies liability or the insured knows or ought to know that his claim will not be honoured” (p. 617).

[127] The more problematic case is Chambo, supra. There, unlike Johnson, the plaintiff did not commence his action against the underinsured motorist until after expiry of the two-year limitation. The insurer took the position that its subrogated rights against the tortfeaser were thereby prejudiced, and it was justified in refusing the claim. The trial judge agreed. The action was therefore dismissed against the insurer. On appeal, the court held that the elimination of the insurers’ claim over against the tortfeaser was no defence. Osborne J.A. stated as follows (at p. 312):

It seems to me that in Johnson v. Wunderlich, Morden J.A. stated in unambiguous terms that in a direct action against the insurer, the words “legally entitled to recover damages”, in the context of the uninsured motorist coverage, require the insured person to establish only that the uninsured motorist is at fault and the amount of the insured person’s damages.

[128] With respect, Chambo was a considerable and unjustified extension of Johnson. In the latter case the insured had preserved a subrogated claim against the tortfeaser by commencing an action within the limitation period. In Chambo, by contrast, the subrogated claim was lost. I agree with Osborne J.A. that it was open to the insured to bring a “direct action” against the insurer, but I think it was also open to the insurer to raise the defence that the insured was no longer “legally entitled to recover” damages from the tortfeasor within the terms of SEF 44.

[129] With all due respect, I do not agree with the view taken by the Ontario Court of Appeal in Chambo and in the present case that conferral of a right of “direct action” provided by s. 4(1)(c) of Regulation 535, a procedural provision, governs the interpretation of the risk accepted by the insurer. It is true that s. 4(1)(c) takes away the right of the insurance company to say that a direct claim is “premature” because the litigation between the insured and the third party tortfeasor has not been pursued to completion. At the same time, however, I do not see how a procedural section such as 4(1)(c) can alter the contractual risk undertaken by the insurance company under SEF 44. Whether the amount to which the respondents are legally entitled is resolved under Regulation 535 by agreement or arbitration or direct action in court, the amount is nevertheless determined by the insurance contract itself, and in this case the terms of SEF 44 themselves speak in the present tense of “is legally entitled to recover” and explicitly make subrogation part of the package accepted by both parties to the insurance contract.

[130] If the insured has prejudiced the subrogation rights of the insurer then this defence should be open to the insurer whether it is pleaded against the insured in a direct action or otherwise.

[131] Counsel for the respondents also placed a good deal of reliance on Burns v. Ferri (1994), 1994 760 (ON CA), 16 O.R. (3d) 569 (C.A.) decided shortly after Chambo, but I do not see that this decision helps him. In that case, the Ontario courts were careful to rectify a release to preserve the insurer’s rights of subrogation against the tortfeaser. If, as the respondents contend, loss of the rights of subrogation are of no consequence in a direct action against the insurer, it is difficult to see why the courts were at pains to rectify the release to enable the subrogation action to proceed.

E. The American Authorities

[132] The respondents rely on the American cases of Transnational Insurance Co. v. Simmons, 507 P.2d 693 (Ariz. Ct. App. 1973), and DeLuca v. Motor Vehicle Accident Indemnification Corp., 215 N.E.2d 482 (N.Y. 1966) for the proposition that under comparable uninsured motorist coverage in at least some of the United States, failure by the insured to protect his or her rights against a tortfeasor affords no defence in a direct action against the insurance company. My colleague, Iacobucci J., suggests that we adopt the majority view (para. 34) reached in various U.S. jurisdictions. I have not undertaken a nose count of the American courts, but their decisions, like ours, are tied to the particular text of their respective policies. In neither the Transnational Insurance nor DeLuca cases did the insurance policies at issue contain explicit reference to subrogation rights. In Allstate Insurance Co. v. Skeeters, 846 F.2d 932 (4th Cir. 1988), on the other hand, where the insurance policy in issue made direct reference to the subrogation interest of the insurer, it was held that a settlement agreement entered into by the insured without the agreement of the insurer defeated the latter’s subrogation interest and thereby provided the insurance company with a complete defence to the claims under the policy. None of these cases is on all fours with SEF 44 and I think we must interpret the Ontario insurance provision in accordance with our own canons of interpretation.

G. Reopening the Limits Agreement

[133] In oral argument, respondents’ counsel suggested that the insurer could move to set aside the Limits Agreement under s. 278(6) of the Ontario Insurance Act, which provides:

278. . . .

(6) A settlement or release given before or after an action is brought does not bar the rights of the insured or the insurer, as the case may be, unless they have concurred therein.

[134] However, this provision must be read in light of the other provisions of s. 278 which govern the subrogation rights of insurers in Ontario. Section 278(1) provides that

[a]n insurer who makes any payment or assumes liability therefor under a contract is subrogated to all rights of recovery of the insured against any person and may bring action in the name of the insured to enforce those rights. [Emphasis added.]

The various subsections of s. 278 deal with the procedure to be followed in conducting a subrogated claim, e.g., whether the insured or the insurer has carriage of the litigation, division of proceeds, etc. Given its legislative context, s. 278(6) has been interpreted to apply only once the insurer has paid or assumed liability to pay an amount to the insured. In Biafore v. Bates-Pasis Leasing Inc. (1976), 1976 801 (ON SC), 11 O.R. (2d) 409 (Div. Ct.), Estey C.J.H.C. stated that (at p. 410)

both practicality and the balanced reading of [s. 278(1) and (6)] require the interpretation of the section to mean that the effective right of subrogation cannot be destroyed by the execution after payment of a release by the insured alone. [Emphasis added.]

See also Toronto Hydro-Electric Commissioners v. Budget Car Rental Toronto Ltd. (1983), 1983 1821 (ON SC), 43 O.R. (2d) 539 (Co. Ct.), and Burns v. Ferri (1992), 1992 7450 (ON SC), 8 O.R. (3d) 11 (Gen. Div.), reversed on other grounds (1994), 1994 760 (ON CA), 16 O.R. (3d) 569 (C.A.).

[135] In my view, s. 278(6) is intended to protect the interests of an insurer who has paid or assumed liability for payment to the insured. It does not limit the ability to settle an action of a plaintiff who has not claimed (and may never claim) against the insurer.

[136] At the time the respondents in this case entered into the Limits Agreement, they had made no claim against their insurer. They were free to conduct the litigation, or release the tortfeasor, as they saw fit. To allow an insurer who had no interest at the time to come along years after the settlement to contest the validity of the Limits Agreement would only contribute uncertainty to the settlement process and undermine the finality of litigation.

V. Conclusion

[137] I do not think the consumer-oriented approach formulated in July, supra, permits us to rewrite the risk which the insurance company accepted under SEF 44, namely the net loss after potential rights of subrogation had been exhausted.

[138] Nor do I believe it is unduly burdensome to require the respondents to have exercised a level of diligence in keeping alive their rights against the tortfeasor that would be expected of them in conducting their affairs in their own interest. After all, prior to making the claim against the appellant, they were acting on their own account, and it is not unfair that they now be held responsible for the consequences of the Limits Agreement they freely entered into.

VI. Disposition

[139] In my view, the appeal should be allowed with costs.

Appeal dismissed, Major and Binnie JJ. dissenting.

Solicitors for the appellant: Dutton, Brock, MacIntyre & Collier, Toronto.

Solicitors for the respondents: Falconeri Strype, Toronto.