SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-08-369028
DATE HEARD: October 1, 2013
ENDORSEMENT RELEASED: October 22, 2013

RE: ECONOMICAL MUTUAL INSURANCE COMPANY v. JAMES RANDALL MONTGOMERY and SADIE MONTGOMERY

BEFORE: Master R. Dash

COUNSEL:
Gabriella Nagy, for the plaintiff

Bruce Chambers, for the defendants

REASONS FOR DECISION

[1] The defendants move to set aside a noting in default in a tort action arising out of a motor vehicle accident. The circumstances of the motion are somewhat unusual.

[2] The original plaintiffs in this action were the persons injured in the accident. Economical Mutual Insurance Company (“Economical”), the liability insurer for the defendant Sadie Montgomery (“Sadie”), denied coverage to Sadie because the insured vehicle was knowingly driven by an unlicensed driver, the defendant James Randall Montgomery (“Randy”). Sadie signed a non-waiver agreement in favour of Economical. Economical never filed a defence on behalf of the defendants, however it settled the claims of the original plaintiffs, took an assignment of the plaintiffs’ cause of action, obtained an order to continue with Economical as the plaintiff, noted the defendants in default and moved for judgment.

[3] While that motion was pending the defendants moved to set aside the noting in default. If I do not set aside the noting in default, Economical seeks judgment from me, but if I determine that only a judge has jurisdiction to grant judgment, then Economical asks that I adjourn their motion to a judge.

THE NON-WAIVER AGREEMENT AND THE DENIAL OF COVERAGE

[4] On December 29, 2006 the original plaintiff, Sakineh Eshaghbaigi, was injured when, as a pedestrian, she was struck by a motor vehicle owned by Sadie and driven by her son Randy. On February 9, 2007 Sadie admitted to her insurer, Economical, that she knew Randy was unlicensed, but she permitted him to operate her vehicle.

[5] Also on February 9, 2007 Sadie signed a non-waiver agreement to permit Economical to take certain steps “without prejudice to the rights of the insurer and the insured in respect of the policy.” A non-waiver agreement is typically requested by an insurer in situations where it may be denying coverage under a liability insurance policy and wants to avoid an argument that they have waived their rights respecting the policy by investigating, defending or settling a claim advanced against their insured.

[6] In the non-waiver agreement Sadie agreed, inter alia, that Economical “may defend all claims or actions…in the name of the insured” and may carry on settlement negotiations “without the further consent of the insured”. It was agreed in paragraph 5 that Economical “may elect at any time to discontinue its…negotiations and, in the case of claims advanced against the insured, its defence” however, in that case Economical “shall give reasonable notice to the insured of its election…as circumstances permit.” Finally in paragraph 6 Sadie agreed:

The Insurer may settle and pay any claim, settle any action, or pay any judgment without notice to the Insured, and amounts paid by the Insurer in respect of the occurrence may be recovered by the Insurer from the Insured if, in an action subsequently commenced, it is determined the Insurer was not legally obligated to the Insured under the policy.

[7] Randy never signed a non-waiver agreement.

[8] On February 20, 2007 Economical wrote to both Sadie and Randy and stated that based on their investigation that determined that Randy was an unqualified driver, “we will seek recovery from you for any sums that we are required to pay as a result of this loss and any future litigation.” In a subsequent letter dated August 21, 2008, Economical stated that because Sadie granted permission to an unlicensed driver to operate the vehicle “we are required to respond to all claims up to the limits of liability set by the province. In Ontario, this amount is $200,000.00. We also have the right to recover any monies paid from yourselves in connection to this loss.” Economical put them on notice that they would seek reimbursement of monies paid up to $200,000.

THE HISTORY OF THE LITIGATION

[9] On December 19, 2008 Sakineh Eshaghbaigi, the injured pedestrian, together with her daughter making a claim under the Family Law Act, commenced this action against Sadie and Randy. For reasons never explained, the statement of claim was not served on Sadie and Randy until January 10, 2010. Sadie then delivered the statement of claim to her insurer, Economical.

[10] It was Sadie’s evidence that she sent the statement of claim to Economical “believing that Economical would defend the claim”. She states that she was never told that Economical would not enter a defence nor that she had a right to retain counsel “personally to defend the claim if Economical was not going to.”

[11] On March 11, 2010 a lawyer with Hughes, Amys (“HA”) wrote to the lawyer for the plaintiffs indicating they were retained by Economical, were instructed to bring a motion to add Economical as a statutory third party pursuant to section 258 of the Insurance Act and “once Economical is added, we shall be in a position to deliver our defence on behalf of Economical.” HA asked that the plaintiffs take no steps “to prejudice the interests of Economical or the Montgomery defendants” and to provide them with notice of any further steps.

[12] Economical took no steps to have itself added as a statutory third party and took no steps to file a defence either as statutory third party or on behalf of the defendants. Instead Economical negotiated a settlement with the plaintiffs for the all-inclusive sum of $177,000.

[13] On June 25, 2010 the original plaintiffs (referred to as the “claimants”) executed and forwarded to Economical a “Full and Final Release and Assignment of Cause of Action.” The agreement recited the denial of coverage by Economical to the defendants, the entitlement of Economical to be added as a statutory third party under section 258(14) of the Insurance Act, the entitlement of the claimants to recover judgment against the defendants and bring direct action for recovery from Economical under section 258(1) of the Insurance Act, the exposure of Economical to pay any judgment against the defendants up to $200,000 and the existence of the non-waiver agreement. The claimants, in consideration of the payment of $177,000, released Economical from all claims arising out of the accident and assigned to Economical “any and all of our rights, title and interest in and to any cause of action, claims and/or Judgment” against Sadie and Randy arising out of the accident. The plaintiffs undertook to co-operate with Economical in pursuing its claims against Sadie and Randy and to provide evidence.

[14] On June 30, 2010 HA wrote to Randy and Sadie advising them of the settlement and enclosing a copy of the Full and Final Release and Assignment of Cause of Action. Economical advised that “having now made this payment to the plaintiffs, Economical is now entitled to pursue you to recover” the $177,000 paid and Economical “has the right to sue you, in its own name, or to continue the plaintiffs’ action against you, by reason of the Assignment.” Economical invited the defendants to contact them to resolve the matter.

[15] The letter of June 30, 2010 was the first indication by Economical to the defendants that they had negotiated a settlement with the plaintiffs. Economical had never advised that no defence had been filed.

[16] There was no response from the defendants to the June 30 letter or to several follow up letters. On March 13, 2011 Economical served the defendants with a motion returnable April 13, 2011 to have Economical added as a statutory third party to the action. Shortly after that Economical discovered that the action had been dismissed as abandoned by the Registrar under rule 48.15 on February 16, 2011 because no defence had been filed. As a result Economical served an amended motion record on April 7, 2011 to set aside the registrar’s dismissal.

[17] On April 13, 2011 the motion was heard by Conway J. No-one appeared for the defendants. Justice Conway set aside the dismissal but declined to add Economical as a statutory third party because Economical wanted to “enforce its rights as assignee of the plaintiffs.” She was not satisfied that Economical had used the right procedure and directed counsel to review Rule 11 (obtaining an order to continue), the procedures for noting in default and “obtaining default judgment as assignee of the plaintiffs’ claim.”

[18] Economical then set about following Justice Conway’s suggestion. On June 27, 2011 they obtained an order to continue under rule 11.02 as assignee of the plaintiffs’ cause of action against the defendants and to replace the original plaintiffs with Economical as sole plaintiff in the title of proceedings. Economical served the order to continue on the defendants by mail on July 5, 2011.

[19] The action was further delayed because the court file had been returned to storage in Cooksville and because it was difficult to obtain an original affidavit of service of the statement of claim on the defendants in order that they could be noted in default.

[20] On November 4, 2011 the defendants were noted in default. Economical did not warn the defendants that they were intending to note them in default and at least under the rules of civil procedure they were not required to do so. (Whether they had an obligation to warn in accordance with their duty of good faith to their insured was not addressed.)

[21] On or about March 6, 2012 Economical applied to the Registrar for default judgment under rule 19.04(1) as a “debt or liquidated demand in money”. On April 11, 2012 Registrar Fedson declined to sign default judgment under rule 19.04(3) and directed that the plaintiff proceed by affidavit evidence for judgment. The registrar gave two reasons for rejection. Firstly the statement of claim was served beyond the six month deadline provided in rule 14.08 for service of a statement of claim (and no extension of time had ever been granted). Secondly she stated that the “principal amount requested appears to be based on a settlement parties may have entered into (or subrogated claim)”. It appears that the Registrar was of the view that the claim was unliquidated and thus beyond her jurisdiction under rule 19.04(1). Only a judge can sign judgment in default on an unliquidated claim, by motion under rule 19.05 based on affidavit evidence as to damages.

[22] As a result, on July 24, 2012 and August 21, 2012 Economical served a motion on the defendants returnable on September 14, 2012. The relief set out in the notice of motion was to add Economical as a statutory third party, to add Economical as a plaintiff as assignee of the original plaintiffs’ rights against the defendants and an order that Economical “in its capacity of statutory third party and assignee of the Plaintiff`s rights”, have Judgment against the defendants in the sum of $177,000.

[23] On September 13, 2012 lawyer Bruce Chambers contacted HA to advise he had been retained by the defendants and asked for an adjournment of the motion scheduled for the next day, which was granted. The motion for judgment was adjourned to December 7, 2012 and again to April 2, 2013.

[24] On February 5, 2013 Mr. Chambers, on behalf of the defendants served this motion to set aside the noting in default also returnable April 2, 2013. On that date Justice McEwan adjourned the defendants motion to set aside the noting in default to the master and left it to the master to determine “whether the plaintiffs motion should be heard if the defendants` motion is unsuccessful”.

(continued verbatim…)

[68] I hereby order as follows:

(1) The noting in default of the defendants is set aside.

(2) The defendants shall deliver their statement of defence to the action within 20 days of the date of this order.

(3) There shall be no costs of this motion.

Master R. Dash

DATE: October 22, 2013