Clark Wilson LLP Insurance Bulletin
Case Law Review Archive
Policy Limits and Multiple Claimants: First Come, First Served!
The Insurance Acts across Canada authorize a judgment creditor
to collect any unpaid portion of his judgment directly from the
defendant's insurer in certain circumstances. In the auto context,
such "direct recourse" provisions are found in sections 21 of B.C.'s
Insurance (Motor Vehicle) Act and 159 of B.C.'s Insurance Act which
provide,
"A person who has a claim against an insured for which indemnity
is provided by [the auto policy], even though the person is not
a party to the [policy], may, on recovering a judgment [against
the insured] in any province or territory of Canada, have the
insurance money payable under the [policy] applied in or towards
satisfaction of the judgment . . . . and may maintain an action
against the insurer to have the insurance money so applied."
In situations where there are multiple claimants and the aggregate
value of the claims exceeds policy limits, the Acts expressly
authorize the insurer to pay the policy limits into court, to be
distributed by subsequent court order (pro-rata), and the payment
into court operates as a "discharge" of the insurer.
In the past, it sometimes happened the auto insurer would settle
one or more of the MVA personal injury claims without first paying
the money into court. Subsequent claims by other injured parties
would either be existing or would later emerge, the aggregate value
of which might "mushroom" over the remaining policy limits. The
question then arose whether any "direct recourse" claims against
the insurer by these other injured parties exposed the insurer to
the full policy limits without any discount for the claims already
settled (i.e.. were the policy limits "renewed" despite earlier
settlement payouts?).
The courts have uniformly ruled against the auto insurer in these
situations and exposed the insurer to "renewed" (full) policy limits
regardless of any earlier payouts: Bartkow and Walker v. Merit
Insurance (1963, B.C.C.A. – Insurance Act ruling), Stobbe v. Allwood
Estate (1993, B.C.S.C. – Insurance (Motor Vehicle) Act ruling). In
the result, where multiple claims emerged out of a motor vehicle
accident which had the potential to exceed policy limits, auto
insurers developed the practice of not settling individual claims but
rather would either pay the policy limits into court or would await
settlement of all claims before funding any payments.
But what about non-automobile situations? For example, what if
multiple injury claims emerged in respect of an accident covered
under a homeowners or a CGL policy? The Insurance Act also allows
"direct recourse" actions against such liability insurers as well
(e.g.. s. 24 of B.C.'s Insurance Act). Like their auto-insurer
counterparts, can such insurers settle and pay some of the liability
claims and thereafter be exposed to payments to other claimants in
excess of the policy limits? "No" says the British Columbia Supreme
Court, rather it is a "first come, first served" situation.
In Re Aviva Canada Inc. (October 2006), the homeowner insurer
confronted a situation where a deck collapse at the insured's
premises during a party resulted in injuries to approximately 45
potential claimants, including children for whom the limitation
period for starting a lawsuit would not be triggered until they
reached the age of majority many years later. The insurer wished to
settle and pay some of the claimants but did not wish to run the
risk of any "direct recourse" exposure for renewed policy limits to
subsequent claimants or judgment creditors. So the insurer took the
rather unique approach of applying to court for a declaration that
it was free to pay settlements on a "first come, first served" basis
with each such payment reducing the liability limits under the
homeowners policy.
The B.C. Supreme Court concluded that the automobile insurance
regime did not apply to non-auto, general liability insurers. It
held that there was a "public interest" rationale arising from the
compulsory nature of auto insurance and that the auto insurance
legislation "contains different language and serves different
purposes" in requiring all claimants to share pro-rata. Rather,
"British Columbia courts . . . should adopt the "first past
the post" approach to non-automobile insurance claims. Given
that there is no public expectation that all accidents which
occur in a non-automobile context should be compensated, there
is no underlying public interest rationale for the imposition
of a pro-rata scheme. By contrast . . . the "first past the
post" approach is preferable. Such an approach is the fairer
option as it encourages early settlement which lessens the
burden on the courts; it rewards those claimants who diligently
move their claims forward; and it affords judgment creditors
the opportunity to realize the fruits of their judgments as
soon as possible."
In the result, the court granted a declaration that:
the liability insurer is entitled to pay settlements and
judgments on behalf of the Insureds under the Policy in the
chronological order in which such defence costs, settlements
and judgments are incurred, agreed to or obtained, without
increasing [the insurer's] obligations to make payments beyond
the limits of liability specified in the policy;
the amounts paid by the insurer [respecting such settlements/
judgments], shall constitute to the extent of such payment,
full and complete satisfaction of [the insurer's] obligations
under the policy, and shall consequently serve to reduce the
limits of liability specified in the policy; and
the insureds and all present or future claimants against them,
are to be bound by the above declarations.
The "first come, first served" approach had earlier been endorsed
in Alberta, Ontario and the United Kingdom and it is perhaps not
surprising that B.C. decided to follow suit. The ruling should
certainly provide some comfort to liability insurers confronting
multiple claims with the potential of exceeding policy limits.
The reasons for judgment in Re Aviva Canada Inc. can be accessed
on the Supreme Court's website at:
http://www.courts.gov.bc.ca/jdb-txt/sc/
06/15/2006bcsc1578.htm
Readers with any questions regarding the judgment are welcome to
contact Nigel Kent by phone (604.643.3135) or by e-mail (npk@cwilson.com).
