Corrigendum: Our reference to the Master’s consideration of an Alberta case, Thompson v. McCallum, erroneously contained the following passage: “The insurer suspected that the insured had, in fact, been the driver.” The sentence should read, “The insurer suspected that the plaintiff had, in fact, been the driver.” The correction has been made in the body of the post.
Kapileshwar v. Sivarajah is an interesting decision of Master Ronald Dash. It deals with some of the problems that can arise where an auto insurer exercises the right conferred by s. 258(14) of the Insurance Act and has itself added as a statutory third party in an action against its insured. That right is given to the insurer where it denies coverage under the contract of insurance.
In this case, the issue before Master Dash was whether the insurer (ING), having added itself as a third party in the action against its insured, had the right to examine the insured for discovery.
(The insured had not defended the action, which was one for personal injuries arising out of a motor vehicle accident, and had been noted in default. Once ING had been added as a statutory third party, it pleaded that the accident had been staged, that there had been no collision between vehicles and that the plaintiff was not injured.)
On this motion, the question was whether ING had a right to examine its insured.
Master Dash noted that for a right of examination to exist under Rule 31.03(3), the party sought to be examined must be adverse in interest to the proposed examining party. Could the requisite adversity ever exist between an insurer and its own insured? He held that it could (although rarely). However, we think that there was a better way to arrive at the same conclusion and we’ll get to that in a moment.
The Master reviewed the legislation and the caselaw decided under it. Citing Bortuzzo v. Barna, [1986] O.J. No. 2888, 54 O.R. (2d) 598 (S.C.O.) and a more recent New Brunswick decision, Parlee v. Pembridge Insurance Co. 2005 NBCA 49 (CanLII), [2005] N.B.J. No. 174, 253 D.L.R. (4th) 182 (N.B.C.A.), he concluded:
The insurer, in defending the plaintiff’s claim in its capacity as statutory third party, notwithstanding coverage issues between it and its insured, must defend against the plaintiffs’ claim in the same manner as if it had accepted coverage and put in a defence on behalf of its insured. In defending the plaintiff’s claims it cannot take a position contrary to the interests of its insured and in fact must act in the best interests of its insured.
The Master went on to observe that issues between the insurer and the insured are not to be decided in the plaintiff’s action against the insured, with one exception, a third party action under Rule 29:
The only time coverage issues may be raised in the original action brought by the plaintiff is if the defendant chooses to put in a defence and adds his insurer as an ordinary procedural third party under rule 29.01 in order to seek indemnity for the claims of the plaintiff. Then the issue would be decided in the third party action, which may or may not be tried with the main action.
This proposition makes sense. If an insured did not have the right to have the coverage issue determined in a third party action, an insured to whom coverage has been wrongfully denied by the insurer could end up with a judgment against him or her and only then have the right to sue for a determination of the coverage issue. Permitting the insured to bring a third party claim against the insurer sees to it that the liability of the insurer to the insured is determined at the same time as the liability of the insured to the plaintiff.
However, that’s not what some of the cases have said. For instance, it was held in Chapman v. Ghesquiere (1998), 39 O.R. (3d) 687 (Gen. Div.) that once an insurer has become a statutory third party under the Insurance Act, its insured cannot issue a third party claim against it. There, Justice Leitch followed the reasoning of Justice Cavarzan in Merrill v. Sommerville, (1992), 11 O.R. (3d) 444, [1993] I.L.R. 1-2902 (Gen. Div.), who said:
[R]ule 29.01 cannot operate to bring in an insurer as a full-fledged third party, where an insurer has already obtained the special, limited third party status conferred by s. 226 of the Insurance Act. This would not be a rule “supplementing” the Insurance Act provision; rather, it would be a rule nullifying it.
We don’t find this reasoning as persuasive as did Justice Leitch in Chapman. Although both s. 258(14) and Rule 29 speak about a “third party”, the two concepts are completely different. An insurer added under the Insurance Act might more aptly be described as an “intervenor”. Permitting an insured to sue the insurer on the coverage dispute in a third party claim is not at all inconsistent with the insurer defending the allegations against the insured in the main action. Prohibiting an insured from having the coverage issue litigated concurrently with the main action means that the insured might have a long wait between judgment being entered against him or her and having a determination of his or her right to indemnity from the insurer.
So, on the authorities, it appears that Master Dash’s endorsement of an insurer being both a third party under the Insurance Act and a R. 29 third party, is not supported. But we think it should be.
Back to the issue in this case: could ING examine its insured?
Master Dash concluded that, in exceptional circumstances, such as where the insured’s conduct prejudices the rights of the insurer, that insurer has a right to examine the insured. He gave as an example an Alberta case Thompson v. McCallum, where the insured had admitted in his statement of defence, that he had been driving the car in which the plaintiff had been a passenger. The insurer suspected that the plaintiff had, in fact, been the driver. Master Dash said that these circumstances placed the insured in a position in which his interests conflicted with those of the insurer:
The defendant was by his actions prejudicing the right of the insurer to fully defend against the plaintiff’s claims. The insurer would have been the victim of collusion between the plaintiff and the insured. The insurer and insured in that rare scenario were adverse in interest and the insurer could examine the insured for discovery.
Applying the same rationale, the Master held that ING was entitled to examine its insured here.
We don’t find this reasoning very satisfying. For one thing, the Thompson approach endorsed by Master Dash gives to the insurer the opportunity to create a conflict of interest through its pleading. Just because the insurer has pleaded that the collision was staged and its own interests are therefore threatened, why should it be able to avoid the prohibition against taking a position adverse to that of its insured?
It seems to us that a stronger rationale for allowing the insurer a right of examination is available. In both Thompson and this case, the insurer suspected the insured of colluding with the plaintiff in a “sweetheart deal” to gain unmerited compensation for the plaintiff. Procedurally though, it would be to the advantage of the insured in each case if the insurer could show that the insured was lying: that would defeat the plaintiff’s claim against the insured. It seems to us that rather than focusing on the interests of the insurer (which should not be relevant), the better rationale for allowing the insurer to examine the insured is that the examination is aimed at eliciting evidence that will aid in the insured’s defence against the plaintiff’s claim. So, it isn’t really adverse to the insured’s interest.