Ontario Superior Court of Justice

Dervisholli et al. v. Cervenak et al. [Indexed as: Dervisholli v. Cervenak]
114 O.R. (3d) 20
2012 ONSC 7137

Ontario Superior Court of Justice,
Hambly J.
December 17, 2012

Professions -- Barristers and solicitors -- Conflict of interest -- Plaintiff suing defendant for damages arising out of motor vehicle accident and also suing her own insurer under underinsured provisions of automobile policy -- Insurer also defendant's automobile insurer -- Same law firm representing insurer with respect to plaintiff's claim for accident benefits and defending plaintiff's tort action -- Law firm using documents and information obtained from plaintiff in accident benefits claim in defending tort action -- Law firm removed as solicitors for defendant on basis of disqualifying conflict of interest.

The plaintiff sued the defendant for damages allegedly suffered in a motor vehicle accident, and also sued State Farm, the plaintiff's automobile insurer, based on the underinsured provisions of the automobile policy. State Farm was also the defendant's automobile insurer, and was added as a statutory third party to defend the plaintiff's action. The law firm represented State Farm with respect to the plaintiff's claim for accident benefits and for the purpose of defending the claim against the defendant. The plaintiff brought a motion for an order removing the law firm as solicitors for State Farm.

Held, the motion should be granted.

Although a different lawyer acted in each matter, the law firm openly used documents and information obtained from the plaintiff in the accident benefits claim in defending the tort action. By acting for State Farm in both matters, the law firm was in a clear position of conflict of interest. [page21 ]

MOTION for an order removing the law firm as solicitors of record.

Cases referred to
Klingbeil (Litigation guardian of) v. Worthington Trucking Inc. (1999), 1999 19927 (ON SC), 43 O.R. (3d) 697, [1999] O.J. No. 867, 172 D.L.R. (4th) 761, 120 O.A.C. 159, 33 C.P.C. (4th) 106, 41 M.V.R. (3d) 257, 87 A.C.W.S. (3d) 152 (Div. Ct.), revg (1997), 1997 12191 (ON SC), 36 O.R. (3d) 656, [1997] O.J. No. 4946, 155 D.L.R. (4th) 469, 50 O.T.C. 215, 1 C.C.L.I. (3d) 62, 18 C.P.C. (4th) 255, 34 M.V.R. (3d) 222 (Gen. Div.), distd
MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235, [1990] S.C.J. No. 41, 77 D.L.R. (4th) 249, 121 N.R. 1, [1991] 1 W.W.R. 705, J.E. 91-85, 70 Man. R. (2d) 241, 48 C.P.C. (2d) 113, 24 A.C.W.S. (3d) 553, EYB 1990-68602, apld

Other cases referred to
Ernst & Young Inc. v. Chartis Insurance Co. of Canada, [2012] O.J. No. 4399, 2012 ONSC 5020, [2012] I.L.R. I-5341 (S.C.J.);
Song v. Hong, [2008] O.J. No. 772, 58 C.P.C. (6th) 135 (S.C.J.);
Stratton v. Senger, [1996] O.J. No. 4774 (Gen. Div.)

Statutes referred to
Insurance Act, R.S.O. 1990, c. I.8 [as am.]

Authorities referred to
State Farm Privacy Notice, online: State Farm

Ben Fortino, for plaintiff/moving party.
Robert Franklin and Jonathan Barr, for defendant State Farm.

Reasons for Decision

[1] HAMBLY J.: -- This is a motion for an order removing the law firm of Reisler Franklin as solicitors for the statutory third party State Farm Mutual Automobile Insurance Company.

The Facts

[2] Hamid Dervisholli ("Hamid") claims to have been involved in a motor vehicle accident on October 29, 2007. She was the owner and driver of a motor vehicle that collided with a motor vehicle owned and driven by Cervenak. Hamid claims to have suffered soft tissue injuries in the accident. State Farm Mutual Automobile Insurance Company ("State Farm") provided separate policies of motor vehicle insurance for both Hamid and Cervenak. Hamid claimed accident benefits from State Farm under her policy with State Farm. She and her five children commenced a tort action on October 15, 2009 against Cervenak and State Farm for their damages, based on the injuries suffered by Hamid in the motor vehicle accident on October 29, 2007. Their claim against State Farm was based on the underinsured provisions of Hamid's policy with State Farm, in the event that Cervenak was found liable for damages sustained in the motor vehicle accident and that their damages exceeded the policy limits of Hamid's policy with State Farm.

[3] State Farm alleges that Hamid and Cervenak staged the accident on October 29, 2007. An order was made on February 22, 2011 that State Farm be added as a statutory third-party pursuant to the Insurance Act, R.S.O. 1990, c. I.8 to permit it to defend the plaintiffs' action against Cervenak, without admitting insurance coverage under the policy for Cernevak. An order was made on November 6, 2012 in which the plaintiffs consented to the dismissal of their action again State Farm without prejudice to their right to recover under Hamid's policy with State Farm, in the event that State Farm denied Cervenak insurance coverage for the motor vehicle accident on October 29, 2007, for any reason except that the motor vehicle accident was staged, fraudulent, intentional or did not take place.

[4] As presently constituted, the plaintiffs' action is only against Cervenak. The law firm of Reisler Franklin represents State Farm both with respect to Hamid's claim for accident benefits and for the purpose of defending the plaintiffs' claim against Cervenak. Separate lawyers from this law firm represent State Farm in each matter. One Michael Foster, a claims representative with State Farm, filed an affidavit of documents sworn July 25, 2012, in which he listed documents obtained by State Farm in relation to Hamid's claim again State Farm for accident benefits. Notwithstanding that separate lawyers represent State Farm in Hamid's accident benefit's claim and in defending Hamid's action against Cervenak, Reisler Franklin is using information and documents obtained by State Farm in Hamid's claim for accident benefits under Hamid's policy of insurance with State Farm to defend the plaintiffs' tort claim against Cervenak.

[5] On its public website [at http://www.statefarm.ca/about/privacy-notice], State Farm states the following:

State Farm Privacy Notice

-- We do not share customer medical information with anyone within the State Farm family of companies, unless you expressly authorize it, or unless it is permitted or required by law, or unless your insurance policy contract with us permits us to do so.

-- We afford our prospective and former customers the same protections as existing customers with respect to the use of personal information.

The Law

[6] In Ernst & Young Inc. v. Chartis Insurance Co. of Canada, [2012] O.J. No. 4399, 2012 ONSC 5020 (S.C.J.) a receiver sued an insurer to enforce a judgment against its insured. Justice T.R. Lederer set out the law regarding the relationship between an insurer and an insured as follows [at para. 141]:

There appears to be little doubt that an insurer owes a duty of good faith to its insured:

The relationship between an insurer and an insured is contractual in nature.

The contract is one of utmost good faith. In addition to the express provisions in the policy and the statutorily mandated conditions, there is an implied obligation in every insurance contract that the insurer will deal with claims from its insured in good faith . . . The duty of good faith requires an insurer to act both promptly and fairly when investigating, assessing and attempting to resolve claims made by its insureds. . . .

and

The authorities are unanimous that a contract of insurance is a contract uberrimae fidei; a contract requiring the utmost good faith. The relationship born of such a contract is imbued with a duty of good faith incumbent on both the insurer and the insured. (Citations omitted)

This is to be contrasted with the relationship between an insurer and a claimant against its insured of which Justice Lederer stated the following [at para. 143]:

An insurer owes no duty to a person asserting a claim against its insured. The claimant is a stranger to the relationship between the insurer and the insured and is not in privity of contract with them . . . . Recognizing such a duty would be "completely unworkable in the context of [an] adversarial relationship", would create "irreconcilable conflicts of interest" and lead to a "breakdown of the indemnity system" [.] (Citations omitted)

[7] In Klingbeil (Litigation guardian of) v. Worthington Trucking Inc. (1999), 1999 19927 (ON SC), 43 O.R. (3d) 697 (Div. Ct.), revg (1997), 1997 12191 (ON SC), 36 O.R. (3d) 656 (Gen. Div.), the plaintiff was an infant. She did not have a policy of motor vehicle insurance. She was struck by a motor vehicle when she was a pedestrian. She claimed accident benefits from the insurer of the owner of the vehicle which struck her. She also commenced a tort action against the owner of the motor vehicle. The action was defended by the same insurer. There was a dispute between this insurer and an insurer who insured a proposed guardian of the infant plaintiff as to which insurer was responsible to pay accident benefits to the infant plaintiff. The same law firm represented the insurer in each matter. The plaintiff brought a motion for an order removing the law firm as solicitors of record in the tort action. The motion was allowed by Justice Ferrier. His judgment was reversed by the Divisional Court in the judgment of Justice Sedgwick. Justice Ferrier referred to a general bulletin dated July 22, 1997 of the Insurance Bureau of Canada. It stated the following [at para. 8]:

INTERNAL TRANSFER OF INFORMATION FROM ACCIDENT BENEFITS ADJUSTER TO TORT ADJUSTER

IBC has received complaints about the practice of some automobile insurers which in adjusting claims where they insure both the tortfeasor for liability coverage and the plaintiff for accident benefits, have not taken appropriate steps to ensure that health records are not disclosed from the accident benefits file to the tort adjuster.

Members are reminded of Rule 13 of the All Industry Claims Agreement which states:

Insurers agree, as a matter of corporate policy, that they shall not gather medical information from doctors or their employees, without the written consent of the patient, subject only to any right to such information under law or rules of practice.

For Rule 13 to be effective, liability insurers are not to seek this medical information indirectly from the insurer which has received it to adjust the accident benefits claim. Where the same insurer insures both the tortfeasor for liability coverage and the victim for accident benefits, they should set-up "Chinese walls" so that information gathered by it regarding the accident benefits claim does not become available to the tort adjuster, unless the insured so authorizes. The tort adjuster must rely solely on the rules of civil procedure to obtain the information on the plaintiffs medical condition or on amounts s/he has received as accident benefits.

We encourage members to review their internal procedures to ensure that they are in compliance with these requirements.

[8] The Divisional Court in reversing the judgment of Justice Ferrier relied on a decision of Justice Matlow in Stratton v. Senger, [1996] O.J. No. 4774 (Gen. Div.). Justice Sedgwick stated the following [at paras. 11-13]:

Allowing the defendant's appeal and setting aside the Master's order, Matlow J. held,

With respect, I see no "appearance of impropriety" or "possibility of unfairness" in permitting Fireman Regan to continue to act for the defendant. The plaintiffs chose to rely on the statutory scheme set out in the Insurance Act to claim accident benefits from the defendant's insurer. The insurer was not, as a result, obliged to segregate or isolate the information provided by the plaintiff in pursuit of his claim when it came to conduct the defendant's defence. It follows, as a matter of logic, that it could obtain the services of the same firm of solicitors for matters pertaining to the accident benefits claim and for the defence of this action. There would be no point in requiring the insurer to retain separate solicitors for each purpose[.]

The court agrees with the disposition of this issue by Matlow J. Where the plaintiffs rely on the statutory scheme set out in the Insurance Act to claim no-fault benefits from the defendant's insurer, the insurer ought not, as a matter of course in a subsequent tort action by the plaintiffs, be required to retain separate solicitors for the no-fault claim and the defence of the tort action.

In the case before us, there has never been a solicitor/ client relationship between McMillan Binch and the plaintiffs. The plaintiffs have their own lawyers. In our view, there is no legal conflict of interest that would disqualify McMillan Binch from continuing to represent Lincoln in its separate capacities in the pending arbitration and in the defence of this tort action on behalf of its insureds, Thompson and Worthington. The analysis of a disqualifying conflict of interest in MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235, [1990] S.C.J. No. 41, does not apply.

[9] In MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235, [1990] S.C.J. No. 41, a lawyer had assisted his principal in representing the plaintiff. The junior lawyer joined the law firm which represented the defendant. The Supreme Court of Canada, in the judgment of Justice Sopinka, held that the law firm was in a conflict interest. A judgment granting an order brought on a motion by the plaintiff removing the law firm for the defendant as solicitors of record was restored on appeal by the Supreme Court of Canada. Justice Sopinka, at para. 17, referred to a code of professional conduct of the Canadian Bar Association which stated the following:

The lawyer must not advise or represent both sides of a dispute and, save after adequate disclosure to and with the consent of the client or prospective client concerned, he should not act or continue to act in a matter when there is or there is likely to be a conflicting interest. A conflicting interest is one which would be likely to affect adversely the judgment of the lawyer on behalf of or his loyalty to a client or prospective client or which the lawyer might be prompted to prefer to the interests of a client or prospective client.

[10] He then stated the following [at paras. 18 and 49]:

The courts, which have inherent jurisdiction to remove from the record solicitors who have a conflict of interest, are not bound to apply a code of ethics. Their jurisdiction stems from the fact that lawyers are officers of the court and their conduct in legal proceedings which may affect the administration of justice is subject to this supervisory jurisdiction. Nonetheless, an expression of a professional standard in a code of ethics relating to a matter before the court should be considered an important statement of public policy. The statement in Chapter V [of the code of professional conduct] should therefore be accepted as the expression by the profession in Canada that it wishes to impose a very high standard on a lawyer who finds himself or herself in a position where confidential information may be used against a former client. The statement reflects the principle that has been accepted by the profession that even an appearance of impropriety should be avoided. . . .

Moreover, I am not convinced that a reasonable member of the public would necessarily conclude that confidences are likely to be disclosed in every case despite institutional efforts to prevent it. There is, however, a strong inference that lawyers who work together share confidences. In answering this question, the court should therefore draw the inference, unless satisfied on the basis of clear and convincing evidence, that all reasonable measures have been taken to ensure that no disclosure will occur by the "tainted" lawyer to the member or members of the firm who are engaged against the former client. Such reasonable measures would include institutional mechanisms such as Chinese Walls and codes of silence.

[11] In Song v. Hong, [2008] O.J. No. 772, 58 C.P.C. (6th) 135 (S.C.J.), the plaintiff's accident benefits insurer retained an occupational therapist in relation to her accident benefits claim. The same occupational therapist provided an opinion to the insurer of the defendant in a tort action brought by the plaintiff. Justice Moore held that she could not testify for the defendant as to her opinions. He stated the following [at para. 65]:

On behalf of vehicle owners and drivers named as defendants in a tort case, such as this one, the insurer's contractual obligation is to provide defence and indemnity in accordance with the policy provisions. Those defendants do not owe a duty of good faith to the plaintiff; in fact those defendants may (and have here) set their position in litigation adverse to the claims made by the plaintiff. In the context of the tort claim, there is no direct, contractual or other dealing between the plaintiff and the insurer. A conflict of interest situation could well arise for an insurer that allows information from an accident benefits file to bleed through to a tort file, and vice versa.

Analysis

[12] What distinguishes this case from Klingbeil is that the plaintiff in this case has a policy of insurance with State Farm in which she claims accident benefits. Reisler Franklin represents State Farm in Hamid's claim for accident benefits against State Farm under her policy of insurance with State Farm. It also represents State Farm in Hamid's tort action against its insured, Cervenak, under his policy of insurance with State Farm. Notwithstanding that a different lawyer in the law firm acts in each matter, Reisler Franklin makes no pretense of erecting a "Chinese wall" or maintaining a "code of silence" between its files in the accident benefits claim and in defending the tort action. It is openly using documents and information obtained from Hamid in the accident benefits claim in defending the tort action. In doing so, it is acting contrary to its privacy notice on its public website. Reisler Franklin in ensuring that State Farm acts in good faith towards Hamid in her claim for accident benefits under her policy of insurance with State Farm conflicts with it duty to Cervenak in defending Hamid's claim against him. State Farm and hence its solicitors owes no duty to Hamid in the tort action brought by her against its insured. By acting for State Farm in both matters, Reisler Franklin is acting in contravention of the principles cited in MacDonald Estate. It is in a clear position of conflict of interest. [page27 ]

Result

[13] There will be an order removing Reisler Franklin as solicitors of record for the statutory third party State Farm Mutual Automobile Company. Hamid may make written submissions on costs within ten days and State Farm may have ten days to respond.

Motion granted.