Excess Auto Insurer Successfully Denies "Direct Recourse" Claim

Under the Insurance Acts in most provinces, a plaintiff who has recovered a personal injury judgment against a defendant is entitled to bring forward a "direct recourse" action against the defendant's insurer to recover the amount of the judgment.  The Insurance Act expressly provides for such direct recourse up to the minimum statutory liability limits ($200,000) notwithstanding that the insured defendant may have breached his policy.  With respect to any direct recourse claims over and above the minimum limits of $200,000, however, the defendant's insurer can raise the insured's breach as a defence to the claim.

But how does this work in a province like B.C. where minimum liability coverage is provided by the government insurer (ICBC) and the excess liability coverage is provided by a private insurer?  If there are two separate insurers involved, must the excess insurer also pay the minimum statutory limits ($200,000) before being allowed to raise the insured's breach as a defence to any direct recourse action?

These issues have now been decided for the first time by the Supreme Court of British Columbia in the October 25, 2002 case of Leeson v. Canadian Northern Shield.  In that case, ICBC provided the statutory minimum liability coverage of $200,000 and CNS provided excess liability coverage up to $1 million.  The insured had breached the policy conditions which limited use of the automobile to licensed drivers and so both ICBC and CNS denied coverage.  The plaintiff ultimately obtained judgment for $400,000 plus costs.  ICBC paid $200,000 by virtue of the "absolute liability" provisions in B.C.'s Insurance (Motor Vehicle) Act and the issue to be decided was whether CNS was liable for the remaining $200,000 under the plaintiff's "direct recourse" action.

The rights of the parties were determined by the relevant provisions of the Insurance Act.  This Act, which was of course drafted before the advent of ICBC, did not expressly deal with the rights of excess insurers in situations of policy breach.  Rather, the "direct recourse" provisions of the Act used language which contemplated only one insurer providing all the liability coverage and hence it was unclear how a policy breach affected the exposure of an insurer who provided only excess coverage above the mandatory minimum liability limits.

In the Leeson case, the British Columbia Supreme Court ruled that the intent of the legislation was to provide direct recourse exposure only up to the province's minimum liability limits ($200,000) and that "where an insurer has provided coverage in excess of the statutory minimum.... it is entitled to rely, as against any direct recourse claimant, upon any defence to which it is entitled as against the insured".  Hence because the insured had breached both the primary and excess policy conditions, the excess insurer could raise that breach as a defence to the direct recourse claim and the claim against CNS was accordingly dismissed.

A copy of the Leeson decision can be accessed on the B.C. Supreme Court's website.

Readers who are interested in this topic generally can also  read a comprehensive paper written by Nigel Kent of Clark Wilson LLP entitled "Uneasy Alliances:  The Relationship Between ICBC and Excess Liability Insurers in B.C.".