Auto Insurer Not Entitled to Reimbursement from Insured for Settlement with Plaintiff Without Insured’s Consent or Judgment Against Plaintiff


We have now obtained the unreported reasons of Mr. Justice Paul Lalonde, the motions judge, whose decision was reversed by the Court of Appeal. Those reasons shed quite a bit of light on what transpired in this case. Accordingly, we have revised our original post. The new version follows.

In Lockhard v. Quiroz, the Court of Appeal dealt with an auto insurer’s “absolute liability” under s. 258 of the Insurance Act. This is an issue that frequently arises but is sometimes misunderstood.

The accident giving rise to the claim took place on Highway 401. The driver, Quiroz, was operating a vehicle owned by the plaintiff Lockhard. He had only a G1 licence. Apparently, neither he nor Lockhard realized that as the holder of a G1 licence, Quiroz was only permitted to drive on a 400-series highway if accompanied by a driving instructor licensed in Ontario.

Lockhard was injured in the accident and she sued Quiroz for property damage and personal injuries.

Her auto insurer was CAA. It took the position that Quiroz had breached the policy (presumably CAA was relying on statutory condition 4). It had itself added to the lawsuit as a third party under s. 258(14) of the Insurance Act. That section allows an insurer to participate in an action against its insured even though coverage may be disputed.

CAA settled directly with Lockhard her claims for property damage and personal injury. The amount of the settlement was $275,000. CAA took this step because of the “absolute liability” that it faced under s. 258(4) of the Insurance Act. That section says:

The right of a person who is entitled under subsection (1) to have insurance money applied upon the person’s judgment or claim is not prejudiced by,

(a) an assignment, waiver, surrender, cancellation or discharge of the contract, or of any interest therein or of the proceeds thereof, made by the insured after the happening of the event giving rise to a claim under the contract;

(b) any act or default of the insured before or after that event in contravention of this Part or of the terms of the contract; or

(c) any contravention of the Criminal Code (Canada) or a statute of any province or territory of Canada or of any state or the District of Columbia of the United States of America by the owner or driver of the automobile, and nothing mentioned in clause (a), (b) or (c) is available to the insurer as a defence in an action brought under subsection (1).

Subsection (1) of section 258 allows a person with a claim against an insured to sue the insurer directly, in certain circumstances. The wording of subsection 258(1) is reproduced in the Court of Appeal’s reasons in Lockhard.

Thus, because of the provisions of s. 258, even if a court were to find that CAA was entitled to deny coverage to Quiroz, the insurer would still be liable to pay the plaintiff up to $200,000, provided that the requirements of s. 258 were met.

A brief note about s. 258, for those unfamiliar with it. The “absolute liability” only extends to the statutory minimum limits of $200,000 (see subsection 258(11) of the Act). For claims that exceed $200,000, an insurer is entitled to avail itself of any defence that it is entitled to set up against its insured. So, for example, if a plaintiff were injured by an insured driver who was unlicensed (as was alleged in this case), the plaintiff would be entitled to proceed to judgment against the driver and then sue the insurer directly, to have up to $200,000 of insurance money applied in satisfaction of the judgment. The insurer would be “absolutely liable” to the claimant for up to $200,000. For claims that exceed that sum, the insurer would be entitled to defend on the basis of whatever policy defences are available to it. To the extent that the insurer has to pay the plaintiff because of its absolute liability, it is entitled, by subsection 258(13), to seek reimbursement from its insured. This subsection is discussed below.

(As noted above, the amount of the settlement in this case was $275,000. It is not clear from the reasons why CAA paid this sum when its absolute liability was limited to $200,000. Perhaps the additional $75,000 represented costs to plaintiff’s counsel.)

The absolute liability provisions of s. 258 are now very difficult for an insurer to avoid. It was formerly thought that s. 258 did not apply where a policy was obtained by misrepresentation. However, in Campanaro v. Kim, the leading case on this section of the Act (the case was referred to by the Court of Appeal in Lockhard), it was held that misrepresentation did not avoid absolute liability.

One of the few remaining situations in which absolute liability will not apply is where a car is being driven without consent.

So, to return to the Lockhard case, CAA settled with the claimant but did not obtain the consent of the driver, Quiroz, before doing so. Further, according to the reasons of the Court of Appeal, judgment was given, on consent, in favour of the plaintiff against CAA. We do not know why this was done. In any event, no judgment was obtained against the insured driver, Quiroz.

(CAA was both a defendant and a third party under the Insurance Act. It appears that Lockhard sued CAA for payment of her property damage claim and so, CAA was a defendant to that contractual claim.)

CAA then sought reimbursement from Quiroz for what it had paid to settle the plaintiff’s claim. It relied on subsection 258(13) of the Act, which provides that “the insured shall reimburse the insurer upon demand in the amount that the insurer has paid by reason of this section and that it would not otherwise be liable to pay.”

To invoke subsection 258(13) successfully, CAA would have to establish that its payment was “by reason of this section” [i.e., absolute liability] and that “it would not otherwise be liable to pay” [meaning that but for absolute liability, CAA would have been entitled to deny coverage].

The problem arose because CAA chose to proceed unilaterally, settling the plaintiff’s claim without requiring that the plaintiff first proceed to judgment against Quiroz or without having gotten Quiroz’s consent to the settlement.

CAA brought two motions before Lalonde J. First, it sought leave to amend its statement of defence (presumably, in its capacity as defendant to the plaintiff’s property damage claim) by adding a crossclaim against Quiroz, who was also a defendant. Secondly, CAA asked for summary judgment against Quiroz, for reimbursement of what it had paid to settle with the plaintiff. Justice Lalonde granted both motions.

CAA’s crossclaim against Quiroz was not limited to the property damage claim, which is the only claim in relation to which CAA was a defendant in the action. The crossclaim that it was given leave to advance was for reimbursement of the entire amount that it had paid to settle property and injury claims with the plaintiff: $275,000. Neither Lalonde J.’s reasons nor those of the Court of Appeal indicate the basis of the crossclaim, but presumably it was based on s. 258(13). Once again, that section says: “the insured [Quiroz in this case] shall reimburse the insurer upon demand in the amount that the insurer has paid by reason of this section and that it would not otherwise be liable to pay.”

The reasons of Lalonde J. suggest that CAA also advanced a counterclaim against Lockhard in relation to the property damage claim (the claim in relation to which it was a defendant), in which it denied that Quiroz had been negligent. We do not know how such an allegation could properly form the basis of a counterclaim. It appears that counsel for Quiroz argued that CAA was taking an inconsistent position by both defending Quiroz and claiming against him. Justice Lalonde said in his reasons that “CAA had both a duty to defend its insured and a right to seek recovery from the insured pursuant to the Insurance Act” and that its pleadings were “akin to pleading in the alternative and as such is not an untenable position”. From what we can see, CAA was not exactly defending Quiroz, but its counterclaim in the property damage claim seems to have at least been supportive of his position, in that the counterclaim alleged that Quiroz had not been negligent.

Counsel for Quiroz argued that CAA was not entitled to reimbursement from Quiroz without first having obtained judgment against him. Justice Lalonde rejected the argument, saying that this “would be akin to denying an insurance company its right of subrogation, which would be a contradiction to the legislation. Such a denial would also discourage parties from settling claims out of court.”

However, the Court of Appeal reversed the order granting summary judgment, on the basis that the plaintiff had not obtained judgment against Quiroz, nor had CAA entered into the $275,000 settlement with the consent of Quiroz. 

The Court of Appeal pointed to the express wording of subsection 258(1) (the section that allows an action by the injured person directly against the insurer). That subsection requires, as a condition precedent, that the claimant have obtained judgment against the insured. That was not done here. By settling with the plaintiff, CAA bypassed subsection 258(1) altogether. The Court of Appeal held that the insurer could not, by settling with the claimant, “bind the insured to a judgment against the insured at the instance of the insurer itself for the amount of the settlement paid”.

CAA relied on several cases in which no judgment had been obtained against the insured before the insurer sued for reimbursement under s. 258(13) (or its predecessors). However, the Court of Appeal noted that in those cases, either the insured had consented to the settlement (Cooperative Fire and Casualty Co. v. Ritchie, [1983] 2 S.C.R. 36) or there had been an actual or “deemed” judgment against the insured. (In Campanaro v. Kim, referred to above and mentioned by the Court of Appeal, there had been an “understanding” that the judgment precondition of s. 258(1) had been satisfied. The Court of Appeal said in that case, that it was proceeding on the basis that it could be taken, for purposes of its analysis, there was a judgment against the driver. This seems to have been what the Court in Lockhard referred to as a “deemed” judgment.)

Justice Lalonde’s reasons also indicate that he may have misunderstood what is meant, in s. 258, by “absolute liability”. He said, at para. 10 of his reasons, that “my decision is also based on the fact that CAA had an absolute liability under the Act to settle the personal injury claim with the plaintiff”. This, of course, is not correct.

In the latter part of his reasons, Lalonde J. addressed the question of whether there was any genuine issue for trial on the issue of whether Quiroz had breached the requirements of the policy, disentitling himself to coverage. This aspect of the decision was not addressed by the Court of Appeal, as it was not necessary for it to do so. Justice Lalonde concluded that the breach of the policy (driving on Highway 401 without the required licence) had been established, entitling CAA to summary judgment against Quiroz, for reimbursement. It was not this finding that the Court of Appeal reversed though; it was because no judgment had first been obtained against Quiroz by the plaintiff, nor had Quiroz’s consent to the settlement been obtained, that the decision of Lalonde J. was overturned.

In a comment to our original post, reader Jim Strachan wondered whether it was now open to CAA to claim reimbursement from Quiroz by proving the reasonableness of the settlement with Lockhard and Quiroz’s breach of the policy. In our response, we referred to an older County Court decision, Allstate Insurance Co. of Canada v. Foster, [1972] 1 O.R. 653, in which the court held that “there are only two ways in which the rights of the parties may be preserved–either by means of a judgment under s. 225 [now s. 258] or by an agreement between the parties”. That decision referred to some even older decisions of higher courts.

The ruling of the Court of Appeal in Lockhard does not specifically address this question. It is our understanding though, that CAA is contemplating a further action against Quiroz, so the issue may yet arise in this litigation.

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