May 17, 2018
Hughes Amys' Alex Reyes' Lawyer's Daily article: Post-loss settlement bars insurer’s subrogated action
Author Michael S. Teitelbaum
Please find pasted below my colleague, Alex Reyes' excellent article on the ONCA decision of Destaron Property Management v. Hindmarsh
, which was just published in The Lawyer's Daily.
Congratulations and Well Done, Alex!
Please note that this article originally appeared on The Lawyer's Daily
website published by LexisNexis Canada Inc.
Post-loss settlement bars insurer’s subrogated action
By Alex Reyes
(May 17, 2018, 8:35 AM EDT) --
In insurance law, subrogation refers to an insurer’s right to sue the party responsible for causing a loss to an insured in order to recover money paid out to its insured to satisfy a claim. Since a subrogating insurer is limited to enforcing only such rights its insured has against the party that caused the loss, problems can arise when an insured settles its uninsured losses with the tortfeasor and provides a general release of liability. In such circumstances, is the insured’s post-loss settlement effective to preclude the insurer’s subrogated action?
This issue was recently addressed by the Ontario Court of Appeal in Destaron Property Management et al. v. Hindmarsh, 2018 ONCA 200, a decision about which subrogating insurers and insurance counsel should be aware.
In Destaron, Robert Hindmarsh was a tenant in a residential apartment building owned by 1260 Marlborough Court Holdings Ltd. and managed by Destaron Property Management Ltd. (DPM). A fire broke out in Hindmarsh’s unit that resulted in damage to his unit and other units and common areas in the building. The fire marshal concluded that the fire originated from gasoline in the bathtub of Hindmarsh’s unit.
Shortly after the fire, DPM delivered a letter to Hindmarsh suggesting he was responsible for the fire. In the letter, DPM indicated that it intended to file applications with the Landlord and Tenant Board to evict Hindmarsh from the unit and to pursue him for damages caused to the building. However, the letter went on to suggest that as “an alternative to legal proceedings [DPM] would normally pursue”, Hindmarsh agree in writing to terminate his tenancy. According to the letter, if Hindmarsh agreed to terminate his tenancy, DPM would not evict him, no further “charges” would be sought, and “damages would be dealt with between the insurance companies”. After receiving the letter, Hindmarsh executed an agreement to terminate his tenancy and vacated his unit.
Two years later, DPM and 1260 Marlborough Court, on behalf of their insurer, brought an action against Hindmarsh alleging that the fire was caused by his negligence and seeking damages of $300,000. Hindmarsh brought a motion for summary judgment to dismiss the action on the basis that DPM’s letter formed part of a settlement agreement between the plaintiffs and him and constituted a release from liability for the fire. The plaintiffs, on the other hand, argued that the letter was not a release or, alternatively, that it was a limited release that did not preclude a subrogated action by the plaintiffs’ insurer.
The motion judge found in favour of Hindmarsh, finding that DPM’s letter operated as a release from liability as it was a promise by DPM to forego a claim for damages in exchange for Hindmarsh agreeing to terminate his tenancy (Destaron Property Management v. Hindmarsh, 2017 ONSC 4444). The motion judge also rejected the plaintiffs’ argument that DPM’s release of liability was a limited release that preserved the insurer’s subrogated rights.
The motion judge noted that DPM’s letter did not expressly refer to any insurer retaining the right to sue Hindmarsh. While the plaintiffs may have had a subjective intention to preserve their insurer’s subrogated rights or to retain a right to recover from Hindmarsh’s insurer, this could not overcome the plain and ordinary meaning of the words used in DPM’s letter. The motion judge therefore granted summary judgment and dismissed the plaintiffs’ action.
On appeal, the Court of Appeal, in brief reasons, upheld the motion judge’s dismissal of the action. The Court found that the motion judge’s conclusion that DPM’s letter amounted to a release of Hindmarsh was not unreasonable. In regards to the plaintiffs’ argument that the reference in the letter to “damages [being] dealt with between the insurance companies” indicated an intention to preserve the subrogated rights of the plaintiffs’ insurer against Hindmarsh’s insurer, the Court held that “the problem [with that argument] is that by releasing the tenant, the effect was to preclude any such claim”.
Before Destaron, the most recent decision by an Ontario court on the issue of whether an insured’s post-loss settlement precludes an insurer’s subrogated action is the decision in Busgos v. Khamis,  O.J. No. 179, which resulted in a much different outcome. In Busgos, similar to Destaron, the action involved a fire on leased premises allegedly caused by the tenant’s negligence. Following the fire, the landlord and tenant came to a settlement regarding the loss and the landlord provided the tenant with a general release from liability. The landlord’s insurer brought a subrogated action against the tenant and the tenant defended on the basis that the action was barred on account of the release.
Unlike Destaron, however, the court in Busgos did not dismiss the insurer’s subrogated action. In Busgos, the court noted that before the landlord and tenant entered into the settlement, the tenant had notice that the landlord’s insurer intended to pursue a subrogated claim. According to the court, if a tortfeasor has notice that an insurer has been subrogated to the claim of the insured, a release given by the insured in favour of the tortfeasor is ineffective against the insurer.
We note that the Busgos decision is not referred to in either the motion judge’s or the Court of Appeal’s reasons in Destaron. Moreover, the issue of whether Hindmarsh (or his insurer) had prior notice of the insurer’s subrogated interest or an intention to pursue it is not mentioned. Courts in other Canadian jurisdictions have declined to follow Busgos (see, for example, B.H. Shopping Centre Ltd. v. Marrazzo,  A.J. No. 781), noting that since the relevant equitable and contractual relationships are between the insurer and the insured, not the insurer and the third party tortfeasor, the appropriate remedy for the insurer in the circumstances should be against the insured and not the third party.
Some legal commentators have also argued that the outcome in Busgos appears to rest on questionable authorities and, moreover, is difficult to reconcile with the view, at common law, that until the insured is completely indemnified, the insured controls any claim against third parties and may settle or release it as long as the settlement is made in good faith.
Given that the Court of Appeal did not address the issue of notice in Destaron, it potentially remains an open question whether prior notice given to a tortfeasor of an insurer’s subrogated interest will render a release provided by an insured ineffective against the insurer. As a result, subrogating insurers, in addition to putting third party tortfeasors on notice of a potential subrogated claim, would be well advised to also notify their insureds, as soon as practicable, of their obligations under the policy to protect the insurer’s subrogated interest and to refrain from entering into any settlements or disposing of any claims that may prejudice the insurer’s subrogated rights.
Alex Reyes is an associate at Hughes Amys LLP. He has a broad insurance defence practice encompassing personal injury, professional negligence and property damage claims. He can be reached at AReyes@hughesamys.com.
Photo credit / SergeyToronto ISTOCKPHOTO.COM
© 2018, The Lawyer's Daily. All rights reserved.