Douglas et al. v. Stan Fergusson Fuels Ltd. et al.
[Indexed as: Douglas v. Stan Fergusson Fuels Ltd.]
Ontario Reports
Ontario Superior Court of Justice,
Abrams J.
August 13, 2014
122 O.R. (3d) 86 | 2014 ONSC 4709
Case Summary
Insurance — Subrogation — Insurer bringing subrogated action to recover amounts paid to its insured for property damage and remediation costs following escape of home fuel oil at residential property — Insured filing for bankruptcy before action commenced — Insurer becoming dominus litus once insured were fully indemnified — Insurer's subrogation rights not extinguished or trumped by Bankruptcy and Insolvency Act — Defendants' motion for summary judgment dismissed — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. [page87 ]
The insurer paid its insured for property damage and remediation costs following an escape of home fuel oil at their residence. The insurer then brought a subrogated action to recover its costs from the defendants, who were allegedly at fault for the spill. Before the action was commenced, the insured filed for bankruptcy. The plaintiffs brought a motion for, among other things, a declaration that the insurer was dominus litus and had the right to continue the action, or alternatively, an order amending the statement of claim to add the insurer as a plaintiff. The defendants brought a cross-motion for summary judgment striking the claim.
Held, the motion should be granted; the cross-motion should be dismissed.
Once its insured were fully indemnified, the insurer became dominus litus. Its subrogation rights were not extinguished or trumped by the Bankruptcy and Insolvency Act. Neither the plaintiffs nor the trustee in bankruptcy had any motivation or obligation to maintain or preserve the viability of the action to protect the insurer's subrogated claim. To grant the order requested by the defendants would be to allow the potential wrongdoer to profit from the fact that the plaintiffs were insured. The court had the inherent jurisdiction to grant declaratory relief in circumstances such as these.
Cases referred to
Gough v. Toronto and York Radial R.W. Co. (1918), 42 O.L.R. 415, [1918] O.J. No. 205 (C.A.); Hryniak v. Mauldin, [2014] 1 S.C.R. 87, [2014] S.C.J. No. 7, 2014 SCC 7, 314 O.A.C. 1, 453 N.R. 51, 2014EXP-319, J.E. 2014-162, EYB 2014-231951, 95 E.T.R. (3d) 1, 12 C.C.E.L. (4th) 1, 27 C.L.R. (4th) 1, 21 B.L.R. (5th) 248, 46 C.P.C. (7th) 217, 37 R.P.R. (5th) 1, 366 D.L.R. (4th) 641; National Fire Insurance Co. v. McLaren (1886), 12 O.R. 682, [1886] O.J. No. 98 (H.C.J.); Somersall v. Friedman, [2002] 3 S.C.R. 109, [2002] S.C.J. No. 60, 2002 SCC 59, 215 D.L.R. (4th) 577, 292 N.R. 1, J.E. 2002-1464, 163 O.A.C. 201, [2002] R.R.A. 679, 39 C.C.L.I. (3d) 1, [2002] I.L.R. I-4114, 25 M.V.R. (4th) 1, 115 A.C.W.S. (3d) 695
Statutes referred to
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [as am.]
Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 96, 97
Insurance Act, R.S.O. 1990, c. I.8, s. 152(1)
Rules and regulations referred to
Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 20.04(2.1), 26.02
MOTION by the plaintiffs for a declaration; CROSS-MOTION by the defendants for summary judgment dismissing an action.
Matthew Gervan, for plaintiffs.
Amy Pressman, for defendants.
ABRAMS J.: —
Background
[1] On January 9, 2008 ("date of loss"), there was an escape of home fuel oil at a residential property located at 4775 Highway 2 West, R.R.# 3, Kingston, Ontario ("loss location"). [page88 ]
[2] At the material time, the plaintiffs were named insureds under policy # 60-E0-2109-6 ("the policy") placed with the State Farm Fire and Casualty Company ("State Farm") with respect to the loss location.
[3] The policy period ran from September 30, 2007 to September 30, 2008. The policy was in good standing.
[4] The policy contained an endorsement pertaining to fuel oil leakage (FE-5470), specifically:
You are insured for sudden accidental direct physical loss or damage to the dwelling and your personal property caused by the accidental escape of fuel oil from a fixed household type tank or apparatus and pipes which are part of a heating unit for the insured dwelling.
[5] The defendants, Stan Fergusson Fuels Ltd. et al., were the fuel oil suppliers, distributors and service contractors for the plaintiffs with respect to their oil furnace heating system, which included their external oil tank.
[6] As part of the service contract, an employee of the defendant Stan Fergusson Fuels Ltd. attended at the loss location to conduct a comprehensive inspection of the plaintiffs' oil furnace heating system, which included the external oil tank, in advance of the date of loss.
[7] In January, 2008, the plaintiffs were being serviced by the defendants on an automatic degree -- day schedule. Accordingly, on or about the date of loss the defendants delivered 622.6 litres of fuel oil to the external oil tank.
[8] There is no quarrel that the entire oil delivery escaped from the external oil tank, thereby contaminating the residential property at the loss location. What caused the escape of the fuel oil and who is responsible for the loss are issues to be determined in this action.
[9] In any event, the parties agree that Mr. Douglas immediately notified the defendant Stan Fergusson Fuels Ltd. about the escape of the fuel oil, which triggered the involvement of an emergency response service retained by the defendants. Moreover, the emergency response service provider engaged Scott Environmental of Kingston to start the oil recovery process. Notably, State Farm had not yet been advised of the loss nor of the remediation work initiated by the defendants.
[10] The matter was eventually assigned to an adjuster for State Farm on January 10, 2008, Mr. John Crawford, whose affidavits (two) are filed in support of the relief sought by the plaintiffs in this motion.
[11] Mr. Crawford learned that the defendant Stan Fergusson Fuels Ltd. had delivered 622.6 litres of oil to the loss location on January 8, 2008, and that the entire delivery had escaped. [page89 ]
[12] Mr. Crawford learned that the defendant Stan Fergusson Fuels Ltd. had retained Scott Environmental to commence the oil recovery process at the loss location.
[13] In the circumstances, Mr. Crawford determined that the plaintiffs' loss was covered under the term of the policy set out above.
[14] It was during the course of adjusting the claim that Mr. Crawford became aware that Ms. Douglas had separated from Mr. Douglas prior to the oil leak and was no longer living in the residence at the loss location.
[15] On March 17, 2008, Mr. Crawford received correspondence from a Mr. Brad Wilson, who identified himself as the adjuster for the defendants. Attached to Mr. Wilson's faxed correspondence were ten pages of invoices from Team 1 -- Environmental Services Inc. in the amount of $137,596.76 related to their services and services performed by Scott Environmental for the month of January 2008, at the loss location. State Farm agreed to pay the invoices.
[16] In response, by correspondence dated March 17, 2008, Mr. Crawford wrote to Mr. Wilson to put the defendants on notice of State Farm's intention to pursue its subrogated interests with respect to the claim as State Farm had reason to believe that the defendants were liable for the loss.
[17] State Farm continued to make payments under the policy for damages to the property and various engineering and oil remediation costs that were required to be incurred because of the oil contamination.
[18] State Farm was advised in 2009, over one year after the date of loss, that Mr. Douglas was going through a bankruptcy proceeding related to family law issues arising out of the breakdown of the relationship with Ms. Douglas. Thereafter, State Farm reported to the trustee's lawyer and mortgagee's lawyer regarding the status of the oil cleanup and the amounts that State Farm was paying under the policy to restore the property.
[19] In May of 2009, State Farm was advised by the trustee's lawyer that the trustee of the plaintiffs intended to sell the property and disclaimed all interest in the contents insurance claims of the plaintiffs. In effect, all insurance claims under the policy ended around the time the property was able to be sold, when the plaintiffs were fully indemnified with respect to the loss.
[20] In July of 2009, State Farm settled the personal contents claims of the plaintiffs with them directly.
[21] Thereafter, the property was sold by the trustee by agreement of purchase and sale, dated September 16, 2009. [page90 ]
[22] As of November 2009, State Farm had made payments and assumed liability for remediation expenses under the policy in excess of $800,000.
[23] State Farm was not advised of any other insurance claims, actions, or intention to commence an action for uninsured or other claims by the plaintiffs or their trustee at any time. As a result, this action comprises only the subrogated claims of State Farm and there is no dispute between State Farm and the plaintiffs or their trustee regarding control of this action.
[24] This action was commenced by State Farm in the names of plaintiffs on January 7, 2010. The action is a fully subrogated claim by State Farm for the recovery of payments made under the policy.
[25] The policy contains a subrogation clause that provides a contractual right of subrogation at clause 18 of the conditions of the policy, which states:
We will be entitled to assume all of your rights of recovery against others and bring an action in your name to enforce these rights when we make payment or assume liability under this policy. Your right to recover from us is not effected by any release from liability entered into by you prior to loss.
[26] In addition to putting the defendants on notice by correspondence, dated March 17, 2008, Mr. Crawford extended an invitation to the defendants to attend at the testing of the oil tank.
[27] Ms. Douglas filed for bankruptcy on January 25, 2007. She was discharged as of November 14, 2007.
[28] Mr. Douglas filed for bankruptcy on June 4, 2009. He was an undischarged bankrupt when the action was commenced against the defendants.
Issues
[29] In the amended notice of motion, the plaintiffs claim the following relief:
(a) Directions from the court with respect to the continuation of this action in the name of the individual plaintiffs or by their subrogee, State Farm Fire and Casualty Company ("State Farm");
(b) Alternatively, a declaration or any other order of the court that State Farm is dominus litis and has the right to continue and control this action to pursue its subrogated claim against the defendants; and
(c) Alternatively, an order granting leave under Rule 26.02 of the Rules of Civil Procedure to amend the Statement of Claim to add as a plaintiff State Farm. [page91 ]
[30] In the cross-motion, the defendants ask the court to determine that the plaintiffs have no capacity to bring or continue this action because of the effect of the plaintiffs' bankruptcies, to strike the plaintiffs' claim because of the plaintiffs' lack of capacity and to grant summary judgment dismissing the plaintiffs' claim as disclosing no reasonable cause of action.
Positions of the Parties
[31] State Farm contends that the right of an insurer to subrogate against a wrongdoer in the context of property insurance is grounded in the equitable doctrine of subrogation and arises out of the relationship between the parties to the insurance contract. An underlying principal of the doctrine is that the right of subrogation is dependent upon securing full indemnity to the insured, on the one hand, and on the other of holding the insured accountable as trustee for any advantage the insured may obtain over and above compensation for the loss.1
[32] State Farm asserts that subrogation being an equitable right, it partakes all of the ordinary incidents of such rights, one of which is that in administering relief the court will regard not so much the form as the substance of the transaction.2
[33] Justice Iacobucci, as he then was, speaking for the majority in Somersall v. Freidman, stated that the underlying objectives of the doctrine 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.3
[34] Moreover, State Farm contends that the doctrine of subrogation has required, in the absence of contractual terms to the contrary, that the insured be fully indemnified before the insurer could commence an action in the name of the insured.4
[35] State Farm also points out that the right of subrogation has long required, with few exceptions, that the insurer is required to commence the action in the name of the insured as was done by State Farm in this case. The judgment when [page92 ]recovered, though it is in the name of the insured, is the property of the insurer.5
[36] Thus, State Farm contends that the plaintiff insureds were fully indemnified for the oil spill damages and that all insurance claims were paid by State Farm prior to the action being commenced. As a result, State Farm is entitled to commence an action in the names of the plaintiff insureds to recover against the parties responsible for the loss.
[37] State Farm further contends that it is also a substantive principle of the doctrine of subrogation that the insured is obliged to pursue any claim it has against the third party, up until such time as the insurer is entitled to and does assert control of the claim. However, the requirement does not impose an obligation on an insured to maintain or preserve the viability of that action or to protect the insurer's subrogated claim.6
[38] State Farm asserts that the property was remediated and restored to the satisfaction of the trustee and the mortgagee so that the property could be sold for the benefit of the creditors. The creditors received the benefit of the insurance payments via remediation and restoration of the property. Further, the trustee did not advance an action on behalf of the estate of the insureds for any uninsured claims and there is no other action arising from this oil spill for damages.
[39] State Farm contends that its subrogation rights would obviously be in jeopardy if State Farm was required to rely upon the insureds or their trustee in bankruptcy to advance an action to protect the insurer's claims.
[40] Finally, State Farm contends that insurance is for the benefit of the owner, not for the advantage of the wrongdoer, and the wrongdoer cannot set up the insurance as an answer to the claim. When the owner in the first place chooses to call upon the insurance company to indemnify him, then the insurance company is by law subrogated to his rights against the wrongdoer. It is the right of the insurer to resort to the courts and to assert, in the name of the insured, his right of action against the wrongdoer. When judgment is recovered, though in the name of the insured, it is the property of the insurer.7 [page93 ]
[41] The defendants contend that the plaintiffs have no capacity to bring this claim or to pursue it by reason of the fact that they both had become bankrupt before they issued the claim. Accordingly, both the property itself as well as the causes of action the plaintiffs assert vested in the plaintiffs' trustee in bankruptcy.
[42] The defendants assert that to permit this claim to proceed would subvert the fundamental tenet of the bankruptcy scheme that a bankrupt's property vests in the trustee. Further, the plaintiffs' insurer, State Farm, necessarily stands in the plaintiffs' shoes and thus has no better claim than the plaintiffs themselves. Accordingly, the defendants contend that the plaintiffs' lack capacity to bring or pursue this claim and thus summary judgment should be granted dismissing the claim. Alternatively, the plaintiffs' claim should be struck based on the same lack of capacity.
[43] Finally, although an action may have been commenced by the plaintiffs' trustee, the applicable limitation period expired over four years ago.
Analysis and Conclusions
[44] There is no dispute between the parties about the following facts, which I find as facts:
(a) this claim arises from a leaking external oil tank situated at the loss location;
(b) the defendants delivered 622.6 litres of fuel oil to the plaintiffs' external tank on January 9, 2008, pursuant to a service contract. The defendants had previously inspected the same oil tank, under the same service contract;
(c) the escape of fuel oil was discovered on January 9, 2008;
(d) the plaintiffs were insured, at the material time, by State Farm under a valid homeowners insurance policy;
(e) the defendants were notified and responded to the escape of fuel oil prior to State Farm being advised of the event;
(f) the defendants retained oil remediation specialists to attend at the loss location prior to State Farm being notified of the event;
(g) State Farm eventually paid for those initial services incurred by the defendants at a cost of more than $140,000; [page94 ]
(h) by correspondence dated March 17, 2008, State Farm put the defendants on notice of its intention to pursue its subrogated interests with respect to the loss;
(i) State Farm ultimately indemnified the plaintiffs in full and paid for repairs, remediation, additional living expenses of Mr. Douglas, personal property and related damages totalling more than $800,000;
(j) pursuant to the terms of the policy, State Farm is subrogated to all rights of recovery of the plaintiffs as against any third parties;
(k) in or about February of 2007, Ms. Douglas filed an assignment in bankruptcy. She was discharged on November 14, 2007, but remained a named insured on the policy that was in good standing at the date of loss;
(l) on or about June 4, 2009, Mr. Douglas made an assignment in bankruptcy. He was an undischarged bankrupt when the action was commenced against the defendant. He, too, was a named insured on the policy that was in good standing at the date of loss;
(m) in or about October of 2009, the trustee sold the property following its remediation and thus satisfied the creditors; and
(n) the statement of claim was issued on January 7, 2010, listing the Douglas as the plaintiffs.
[45] The plaintiffs were insured under a policy with State Farm at the date of loss.
[46] The policy was in good standing.
[47] The policy provided for subrogation in circumstances such as those alleged in the statement of claim.
[48] The right of subrogation was a contingent right that vested at the time the policy was entered into.
[49] Both of the plaintiffs remained named insureds under the policy notwithstanding the issues arising from the breakdown of their relationship, including their respective bankruptcy proceedings.
[50] The plaintiffs have been fully indemnified under the policy. This action is a fully subrogated claim by State Farm for the recovery of payments made under the policy.
[51] Thus, State Farm became, at common law, the dominus litis once the plaintiffs were fully indemnified. [page95 ]
[52] Moreover, by operation of s. 152(1) of the Insurance Act, R.S.O. 1990, c. I.8:
152(1) The insurer, upon making a payment or assuming liability therefor under a contract to which this Part applies, 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 such rights.
[53] The defendants, who, having allegedly caused the loss, retained the oil remediation specialists and thereafter handed over the total costs for remediation of the property to the plaintiffs' insurer, seek to avoid a trial of the action on the merits by asserting that the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 extinguishes or trumps the subrogation rights of an insurer that is subrogated to recover from a potential tortfeasor. In short, to grant the order requested by the defendants would be to allow the potential wrongdoer to profit from the fact that the plaintiffs were insured.
[54] To give effect to the relief requested by the defendants in their cross-motion would be to incorrectly emphasize form over substance, which is the opposite of the substantive principle articulated by the Supreme Court in Somersall v. Freidman.8
[55] Further, to give effect to the defendants' position would offend the second of the two underlying objectives of the doctrine of subrogation as articulated by Iacobucci J. in Somersall v. Freidman, specifically [at para. 50]:
First, it is important to keep in mind the underlying objectives of the doctrine of subrogation which are to ensure . . . (ii) that the loss falls on the person who is legally responsible for causing it.
(Emphasis added)
[56] In all of the circumstances, I am not persuaded that the Bankruptcy and Insolvency Act extinguishes or trumps the subrogation rights of State Farm, which vested at the time the policy was entered into and which remained in place at the date of loss. Nor am I persuaded that to permit this claim to proceed would subvert the fundamental tenet of the bankruptcy scheme, as the defendants contend. The plaintiffs have been fully indemnified under the policy and the trustee has satisfied the creditors through the sale of the property, which could not have been sold but for the remediation paid for by State Farm. No subversion [page96 ]will result if the claim proceeds. Rather, an inequitable result may prevail in the event that State Farm is prohibited from prosecuting this claim. Why? Because neither the plaintiffs nor the trustee, at this juncture, have any motivation or obligation to maintain or preserve the viability of this action to protect State Farm's subrogated claim. Pursuant to the Courts of Justice Act, this court has the inherent jurisdiction to grant declaratory relief in circumstances such as these.
Held
[57] State Farm is dominus litis and has the right to continue and control this action to pursue its subrogated claim against the defendants, without need of amending the statement of claim to add State Farm as a party.
[58] For all of the reasons set out above, there are genuine issues requiring a trial, which would be against the interests of justice to resolve using the new fact-finding powers in rule 20.04(2.1) of the Rules of Civil procedure, R.R.O. 1990, Reg. 194 on a summary judgment motion.10
[59] For all of the reasons set out above, the defendants request that the plaintiffs' claim be struck must fail.
[60] If the parties cannot agree on the issue of cost of the motion and cross-motion, written submissions of no more than two pages, double spaced, may be filed within 30 days.
Motion granted; cross-motion dismissed.
Notes
1 National Fire Insurance Co. v. McLaren (1886), 12 O.R. 682, [1886] O.J. No. 98 (H.C.J.), at para. 10.
2 Ibid., at para. 10.
3 Somersall v. Freidman, 2002 SCC 59, at para. 50.
4 Ibid., at para. 53.
5 Gough v. Toronto and York Radial R.W. Co. (1918), 42 O.L.R. 415, [1918] O.J. No. 205 (C.A.), at para. 9.
6 Somersall v. Freidman, supra, at para. 54.
7 Gough v. Toronto and York Radial R.W. Co., supra, at para. 9.
8 Somersall v. Freidman, supra — see headnote, second last full paragraph: "Subrogation is a matter of substance, not form." Note, also, in the same paragraph: "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."
9 Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 96 and 97.
10 Hryniak v. Mauldin, 2014 SCC 7.
End of Document