ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-11-2312-00
DATE: 2015-07-29
B E T W E E N:
Vadim Lica
Marc Flisfeder, for the Plaintiff
Plaintiff
- and -
Kuljit Dhaliwal and Abdulkarim Nur and Intact Insurance Company
Defendants
Kuljit Dhaliwal, In-person
Abdulkarim Nur, In-person
Craig Edwards, for the Defendant Intact
- and -
State Farm Mutual Automobile Insurance Company
Jonathan Schrieder, for the Statutory Third Party State Farm
Statutory Third Party
HEARD: February 23, 2015,
at Brampton, Ontario
Justice David Price
Reasons For Decision
[1] Vladim Lica (“Mr. Lica”), the plaintiff in this proceeding, was injured in an automobile collision that he says was caused by the defendants Kuljit Dhaliwal (“Mr. Dhaliwal”) and Abdulkarim Nur (“Mr. Nur”). Mr. Dhaliwal’s and Mr. Nur’s insurer, State Farm Mutual Insurance Company, denied coverage under its policy and had itself added as a statutory third party in the action, but refuses to provide detailed information to its insured as to why it denied coverage.
[2] Mr. Lica says that he needs this information for the following reasons:
a) to enable him to claim underinsurance coverage from his own insurer, the defendant Intact Insurance Company (“Intact”), pursuant to the OPCF 44R endorsement to his insurance policy from Intact.
b) to enable Intact to assess its potential liability and to enable it to make an informed decision as to what reserves to maintain in relation to Mr. Lica’s action.
[3] Mr. Lica seeks an order requiring State Farm to answer the questions he asked it by written interrogatory, and that it refused to answer. He also seeks an order requiring State Farm to deliver a sworn Affidavit of Documents.
BACKGROUND FACTS
[4] This action arises from an automobile collision that occurred on March 7, 2011, in Brampton, in which Mr. Lica says his vehicle was struck (“T-boned”) by a vehicle operated by Mr. Dhaliwal and owned by Mr. Nur.
[5] The driver, Mr. Dhaliwal, and the owner, Mr. Nur, did not defend the action. They both have been noted in default.
[6] Mr. Nur’s automobile insurer is State Farm. State Farm says that it denied coverage to Mr. Nur as a result of the following:
a) A material misrepresentation by Mr. Nur; and
b) Mr. Dhaliwal’s and Mr. Nur’s lack of cooperation.
[7] State Farm obtained an order from Fragomeni J. dated March 13, 2012, adding State Farm as a statutory third party to the action, pursuant to section 258(14) of the Insurance Act.[^1] By refusing coverage, State Farm reduced the amount that is available to Mr. Lica to the statutory minimum of $200,000 available under his own policy. State Farm delivered a Statement of Defence and Jury Notice on April 11, 2012.
[8] Intact is Mr. Lica’s auto insurer. After State Farm denied coverage to its insured, Mr. Nur, Mr. Lica amended his Statement of Claim to add his own insurer, Intact, as a defendant.
[9] At the time of the collision, Mr. Lica’s auto insurance policy with Intact contained a Family Protection Coverage Endorsement (the “OPCF 44R”). This endorsement provided additional coverage in the event that Mr. Lica suffered injuries that were caused by a tortfeasor who was either uninsured or underinsured. The OPCF 44R has a coverage limit of $1,000,000, which is greater than the limit of coverage available to third parties, such as Mr. Lica, against the tortfeasors, Mr. Dhaliwal or Mr. Nur.
[10] Intact will be liable only if Mr. Lica’s claim exceeds State Farm’s policy limits. Since State Farm is denying coverage to its insured and, in doing so, has reduced the amount of coverage available under its policy, the basis and legitimacy of State Farm’s denial of coverage is relevant to Intact’s potential liability.
[11] Intact’s lawyer sent a letter dated May 17, 2013, to State Farm’s lawyer, confirming Intact’s position that its underinsured coverage would not be triggered until there was a legal determination confirming State Farm’s denial of coverage and reduced policy limits.
[12] The examination for discovery of State Farm was scheduled to take place on April 18, 2013. State Farm was properly served with a Notice of Examination, but its representative failed to attend at the examination.
[13] Mr. Lica subsequently elected to examine a representative of State Farm by written interrogatories. State Farm refused to answer 28 of the 44 questions that Mr. Lica’s lawyer posed. The refused questions all relate to State Farm’s decision to deny coverage to its insured. State Farm says that the questions are not relevant to the action. Additionally, State Farm has failed to deliver a sworn affidavit of documents.
[14] A mediation of this action was scheduled for January 23, 2014. Mr. Lica asserts that State Farm’s refusal to answer any questions relating to its denial of coverage prevented Intact from assessing its potential liability before this mediation, and may serve as an impediment to successful mediation in the future.
ISSUES
[15] The court must determine the following issues in this motion:
a) Are Mr. Lica’s questions to State Farm relevant to the action?
b) Is State Farm required to answer Mr. Lica’s questions?
c) Is State Farm required to deliver an affidavit of documents?
ANALYSIS AND LAW
a) Are Mr. Lica’s questions as to State Farm’s denial of coverage relevant to the action?
[16] The scope of an examination for discovery is governed by Rule 31.06 of the Rules of Civil Procedure. Such an examination is limited to issues that are relevant to the action. The rule states:
31.06(1) A person examined for discovery shall answer, to the best of his or her knowledge, information, and belief, any question relevant to any matter in issue in the action or to any matter made discoverable by subrules (2) to (4) and no question may be objected to on the ground that,
(a) the information sought is evidence;
(b) the question constitutes cross-examination, unless the questions is directed solely to the credibility of the witness; or
(c) the question constitutes cross-examination on the affidavit of documents of the party being examined.
[17] State Farm argues that Mr. Nur’s coverage under his policy with it is not an issue that is relevant to Mr. Lica’s action against Mr. Dhaliwal and Mr. Nur.
[18] State Farm notes that it was added as a statutory third party pursuant to s. 258(14) of the Insurance Act. That section provides:
258(14) Where an insurer denies liability under a contract evidenced by a motor vehicle liability policy, it shall, upon application to the court, be made a third party in any action to which the insured is a party and in which a claim is made against the insured by any party to the action in which it is or might be asserted that indemnity is provided by the contract, whether or not the insured enters an appearance or defence in the action.[^2]
[19] The purpose of section 258(14) is to allow an insurer that has denied coverage to be added as a third party “so that it may participate in the defence of the action against the insured, without in any way prejudicing the defence it may have against the insured, or any right which the insurer may have to recover against the insured.”[^3]
[20] The purpose of third party proceedings pursuant to section 258(14) is limited. Generally speaking, its purpose “is not to enable the question of the right of indemnity as between the insured and the insurer to be determined in the proceeding, nor is it for the purpose of avoiding a multiplicity of proceedings.”[^4]
[21] The purpose of section 258(14) is not generally to determine issues, including coverage issues, as between the insured and the insurer. This has been described as the fundamental difference between a statutory third party and a procedural third party.[^5] The long-standing and fundamental doctrine of privity provides that a contract, and specifically an insurance contract, neither confers rights nor imposes obligations on third parties. Simply put, an insurance contract is between the insurer and its insured alone.[^6] If there are issues to be resolved between them, they may be decided in a proceeding by the insured against his insurer for indemnity under the policy, or in a proceeding by the insurer against the insured, to recover the statutory minimum it has paid to the plaintiff in the course of the proceeding.[^7]
[22] Justice Stewart, in Ahmed v. Maharaj, in 2010, held that, “as a general rule, issues of liability and insurance coverage therefore are to be kept separate (see: Gordon v. Pendleton, O.J. No. 3664) ….[a]ccordingly, an insurer added as a statutory third party should not be required to define or explain its position regarding any coverage issues in examination for discovery by other parties to the proceedings.”[^8] Stewart J. went on to state that a plaintiff who wishes to challenge the denial of coverage by an insurer may pursue the insurer based on a judgment obtained following trial, as provided for by section 258(1) of the Insurance Act.[^9]
[23] State Farm argues that based on Ahmed v. Maharaj, there is no basis for allowing Mr. Lica, or his insurer, Intact, to enforce any terms or obligations under the contract between State Farm, as insurer, and its insured, Mr. Nur. It says that Mr. Lica’s action is not the proper forum for dealing with coverage issues. It submits that, based on the underlying purpose of section 258(14) of the Insurance Act, the jurisprudence is clear that a plaintiff’s action against an insured is not the forum for deciding issues between the statutory third party insurer and its insured. This interpretation of the section is required, it says, in order to allow the statutory third party to participate in the proceeding without prejudicing any defence it may have against the insured or the plaintiff.[^10] It submits that allowing a plaintiff to examine on coverage issues the tortfeasor and his insurer would offend the underlying principles of section 258(14).
[24] State Farm further argues that in its capacity as a statutory third party, it must defend Mr. Lica’s claim against its insured, Mr. Nur, in the same manner as if it delivered a defence on behalf of Mr. Nur. In doing so, it cannot take a position contrary to the interests of its insured, and must act in the insured’s best interests, despite any unresolved coverage issues.[^11]
[25] State Farm submits that the court must not permit issues between State Farm, as insurer, and Mr. Nur, as insured, to be made an issue in the main action, but must require that they be dealt with in subsequent proceedings, if necessary. Any proceedings between State Farm and Mr. Nur, it says, must be tried separately from a proceeding between Mr. Lica and Intact, after the conclusion of the trial. Coverage issues between a statutory third party and its insured “are not fought out in the original action, but await the event.”[^12]
[26] The courts have generally considered that “the only” situation where coverage issues may be decided in a main action is where an insured chooses to submit a defence, and adds his own insurer as an ordinary procedural third party under Rule 29.01, in order to seek indemnity for the plaintiff’s claims.[^13]
[27] Rule 31.06 (4) and (5) govern the scope of examination of a party in relation to an insurance policy. Those sub-rules provide:
31.06 (4) A party may on an examination for discovery obtain disclosure of,
(a) the existence and contents of any insurance policy under which an insurer may be liable to satisfy all or part of a judgment in the action or to indemnify or reimburse a party for money paid in satisfaction of all or part of the judgment; and
(b) the amount of money available under the policy, and any conditions affecting its availability.
(5) No information concerning the insurance policy is admissible in evidence unless it is relevant to an issue in the action.[^14]
[28] Lane J., in Seaway Trust Co. v. Markle, in 1992, discussed the scope of rule 31.06(4). He stated that its purpose is to enable the opposite party to have information necessary for making an informed decision as whether to proceed with the action, and that it was not its intent to open up the whole file between the insurer and the insured, or to broaden the scope of production of insurance related documents beyond the policy itself.[^15]
[29] Perell J., in Brigaitis v. IQT, Ltd., in 2014, applied Lane J.’s reasons in Seaway Trust Co. v. Markle, holding that additional particulars regarding the policy in question were not warranted, as they were not relevant to the issues in the lawsuit.[^16]
[30] The relevance of questions asked at an examination for discovery is determined by the pleadings in the action. In the present action, Mr. Lica has pleaded, in his amended statement of claim, that he is entitled to underinsurance coverage from Intact. (Paragraphs 11 and 12 of his amended statement of claim incorrectly name State Farm, instead of Intact, and Mr. Lica asks for leave to further amend his amended statement of claim to correct this oversight.)
[31] Mr. Lica can access his insurance coverage under his OPCF 44R endorsement only if it is determined that State Farm was legally justified in denying coverage to its insured. State Farm’s refusal to answer the questions it was asked in this regard prevents the court from making this determination, and may affect Mr. Lica’s ability to be fully compensated for the losses he says he has suffered.
[32] Most of the questions that State Farm has refused to answer are based on documents that it listed in Schedule “A” of its draft affidavit of documents. By listing these documents in Schedule “A”, State Farm acknowledges that the documents, and the subject matter to which they pertain, are relevant to the action.
[33] In Maccaroni v. Kelly, in 2011, the Court of Appeal for Ontario gave guidance as to how the OPCF 44R endorsement should be applied where the tortfeasor’s insurer has denied coverage.[^17]
[34] The Court of Appeal held that the OPCF 44R endorsement is intended to protect an insured policyholder in the event that he or she is involved in an accident in circumstances where the limit of liability he or she has under this endorsement is greater than the third party liability limits of the tortfeasor, whose actions caused his or her injuries. In the event the policyholder’s damages exceed the third party liability coverage, the policyholder can recover from his or her own insurer under the OPCF 44R endorsement to his or her own policy.[^18]
[35] The Court of Appeal reviewed the wording of the OPCF 44R endorsement. It provides:
1.5 "inadequately insured motorist" means
(a) the identified owner or identified driver of an automobile for which the total motor vehicle liability insurance . . . obtained by the owner or driver is less than the limit of family protection coverage . . . . . . . .
1.8 "limit of motor vehicle liability insurance" means the amount stated in the Certificate of Automobile Insurance as the limit of liability of the insurer with respect to liability claims, regardless of whether the limit is reduced by the payment of claims or otherwise;
PROVIDED THAT in the event an insurer's liability under a policy is reduced by operation of law to the statutory minimum limits in a jurisdiction because of a breach of the policy, the statutory minimum limits are the limits of motor vehicle liability insurance in the Policy.[^19]
[36] The Court of Appeal in Maccaroni held that it is not sufficient for a statutory third party to allege a breach of the conditions of its policy to reduce the limits of coverage available to pay third party claimants. That is, the court requires more than the statutory third party’s “say-so” to determine whether the limits of its liability are “reduced by operation of law”.[^20]
[37] In Maccaroni, the Court of Appeal further held that by alleging a breach of its policy, and having itself added as a statutory third party, the insurer that denies coverage merely preserves its position. If the insurer’s position is borne out by the evidence, and it proves, on a balance of probabilities, that the insured breached the conditions of his policy, then the liability policy limits will be reduced to the statutory limits provided for in section 258 (11) of the Insurance Act.
[38] Based on the Court of Appeal’s decision in Maccaroni, the effect of section 258 (11) is to reduce the limits of the policy to the statutory minimum where it is determined that there has been a breach of a policy condition “by operation of law”. Until there is a finding to that effect, the insurer’s allegation of a policy breach is only an unproved allegation, and the policy limit is as set out in the insured’s policy.[^22]
[39] In the present case, the questions that State Farm refused to answer are related to its decision to deny coverage. A court requires this information to determine whether State Farm’s allegation that its insured breached the conditions of his policy are borne out by the evidence. This is the type of evidence that the Court of Appeal found was necessary in Maccaroni.
[40] If it is found that State Farm was justified in denying coverage, Mr. Lica would have access to the coverage afforded to him from Intact Insurance by his OPCF 44R endorsement. However, without knowing the facts upon which State Farm denied coverage to its insured, a Court will be unable to determine whether it was justified in taking that position.
State Farm’s argument that Mr. Lica is seeking to litigate State Farm’s denial of coverage
[41] State Farm argues that Mr. Lica seeks to challenge State Farm’s denial of coverage to its insured. It says that Mr. Lica and his insurer, Intact, are not privy to its insurance contract with Mr. Nur, and that there is therefore no basis, in contract law or otherwise, for them to enforce any terms or obligations in Mr. Nur’s contract of insurance with State Farm. It says that Mr. Lica and Intact have no standing to challenge State Farm’s denial of coverage, and that State Farm should not be compelled to answer their questions.
[42] State Farm argues that a plaintiff’s action against an insured tortfeasor is not the proper forum for deciding issues as between a statutory third party insurer and its insured. It says that no claim against State Farm can proceed until the court has rendered judgment against the defendants. It says that a determination as to whether Mr. Nur is covered under State Farm’s policy should not be decided in Mr. Lica’s action, as it would prejudice the defence of the action, and would be contrary to the duty that State Farm, as a statutory third party, owes, which is to act in its insured’s best interests. I disagree.
[43] The Court of Appeal in Maccaroni rejected the argument that the merits of the insurer’s denial of coverage can only be determined in an action between the statutory third party and the tortfeasor. The Court held that a factual determination in respect of the coverage issue binds neither the statutory third party nor the tortfeasors, and affects only whether the plaintiff is entitled to coverage from its own insurer under the OPCF 44R endorsement.
[44] Mr. Lica is not challenging State Farm’s denial of coverage. He acknowledges that State Farm may have been justified in denying coverage. However, he requires evidence as to their reasons, so that it, and a court, can determine whether coverage was denied “by operation of law” for the purposes of Mr. Lica’s claim for OPCF 44R coverage.
[45] The jurisprudence that State Farm relies on does not address the interplay between section 258(14) of the Insurance Act and the OPCF 44R endorsement. It is, therefore, not helpful to the court in making its determination in the present motion.
b) Is State Farm required to answer the questions that Mr. Lica posed by written interrogatory?
[46] In Maccaroni, the plaintiffs settled their case with the statutory third party. Thereafter, that insurer was no longer a party to the action. On those facts, the Court of Appeal held that a representative of the statutory third party could be called as a witness, and could be examined under oath as a non-party.[^23]
[47] The Court of Appeal in Maccaroni explained that a plaintiff must prove that the statutory third party’s denial of coverage is legally justified, in order to succeed in his action against his own insurer for OPCF 44R coverage. The court’s decision assumes that the statutory third party will provide evidence justifying its denial of coverage, since this evidence is available only from that source.
[48] In the present action, State Farm, as statutory third party, is a party to the action. Given the Court of Appeal’s rationale in Maccaroni, it must be assumed that a statutory third party is required to answer relevant questions as to its denial of coverage.
[49] Master Pope, in Zonneville v. Andrews, held that information is available from a non-party by disclosure even if that information is not admissible at trial.
[50] Justice Newbould, in 1632842 Ontario Limited v. Great Canadian Gaming Corp., in 2008, stated that where evidence sought from a witness is relevant, there is a prima facie right to examine so long as the right is not exercised in a manner constituting abuse of process.
[51] The trial judge must ultimately determine whether the documents that Mr. Lica’s counsel has requested are admissible based, in part, on whether the prejudice that such evidence would cause to the defence of Mr. Dhaliwal or Mr. Nur outweighs its probative value. At present, the issue is whether the evidence should be disclosed.
[52] As noted above, rule 31.06 governs the scope of examination.
[53] Mr. Lica says that he needs the information regarding State Farm’s denial of coverage to enable him to claim underinsurance coverage from his own insurer, Intact, pursuant to the OPCF 44R endorsement to his insurance policy from Intact, and to enable Intact to assess its potential liability and make an informed decision as to what reserves to maintain in relation to Mr. Lica’s action.
[54] The information that Mr. Lica seeks concerning the defendants’ insurance falls within the rationale of rule 31.06(4).
[55] State Farm submits that in its capacity as a statutory third party, it must defend Mr. Lica’s claim against its insured, Mr. Nur.
[56] Rule 31.06(4) provides that where information may become relevant only after determination of an issue and disclosure would seriously prejudice a party, the court may grant leave to withhold the information.
[57] In Wright et al. v. Clark et al., in 1984, Master Sandler held that the plaintiff’s right of discovery was limited to the existence and contents of the policy.
[58] Rule 31.06(1) provides that the court must first determine whether the information is relevant.
[59] In the event that State Farm brings a motion under Rule 31.06(4), the court may also consider litigation privilege.
[60] The Court in Agrico Canada Ltd. discussed litigation privilege principles.
[61] In Supercom of California Ltd. v. Sovereign General Insurance Co., the court discussed waiver of privilege.
[62] Wilson J. stated principles regarding qualified privilege.
[63] Based on the foregoing, I conclude that where coverage has been denied, the court should determine whether an insurer must disclose the information and documents relating to its decision on a case by case basis.
[64] Information as to “material misrepresentation and lack of cooperation” may or may not affect Mr. Lica’s third party claim and may or may not prejudice the defence. If State Farm has concerns, it must provide an answer‑by‑answer analysis.
c) Is State Farm required to deliver a sworn Affidavit of Documents?
[65] Rule 30.03 of the Rules of Civil Procedure requires every party to serve on every other party an affidavit of documents disclosing all relevant documents.[^29]
[66] State Farm has not delivered a sworn affidavit of documents as required by Rule 30.03. It must do so.
CONCLUSION AND ORDER
[67] Based on the foregoing, it is ordered that:
Mr. Lica has leave to make a further amendment to his statement of claim to name Intact instead of State Farm in paragraphs 11 and 12.
State Farm shall, by August 15, 2015, answer the questions that Mr. Lica’s counsel asked in his written interrogatories. If State Farm is of the opinion that the information that Mr. Lica’s counsel has requested will prejudice the defence of Mr. Dhaliwal or Mr. Nur, or raise an issue of privilege, it may seal its answers and tender them to me for review, with a letter outlining their specific concerns.
State Farm shall, by August 15, 2015, produce a sworn affidavit of documents to the plaintiffs; and
If the parties are unable to agree on costs, they may submit written arguments, not to exceed four pages, plus a Costs Outline, by August 15, 2015.
Justice David Price
Released: July 29, 2015