C.A. Says Bad Faith Action Against Auto Insurer Not Subject to Limitation Period in Policy

The Court of Appeal’s decision in Dundas v. Zurich Canada, 2012 ONCA 181, is interesting for a couple of reasons: liability of an insurer for failing to pay its policy limits into an interest-bearing account and the limitation period that applies to a bad faith claim against an auto insurer.

Here, the underlying action alleges liability on the part of an auto insurer, for having failed to pay its policy limits into an interest-bearing account, for the benefit of injured claimants who were suing its insureds. While I’ve seen this issue raised several times before and I’m aware of one case in which a judge commented on it (Drummond v. Fortune, 1994 CarswellOnt 3964 (Ont. Ct. (Gen. Div.)), I hadn’t seen a case in which the question was raised directly as a basis for liability: is there an obligation on the part of a liability insurer to pay its policy limits into an interest-bearing account, for the benefit of claimants?

That question isn’t answered by the Court of Appeal decision. Rather, the question that arose here was whether the claim against the insurer was prescribed. The Court rejected the view of the court below, that the claim was barred by a one-year limitation period found in the policy. Instead, it held that the claim against the insurer was not an “action or proceeding against the Insurer under [the insurance contract] … in respect of the loss or damage to person or property” within the meaning of statutory condition 6(3)”. Therefore, the contractual limitation period (one year from the date on which the cause of action arose) did not apply.

It also held that the cause of action against the insurer was only complete when the insurer had an obligation to indemnify its insured.

The plaintiffs in the case had obtained judgment against Zurich’s insureds, for an amount slightly in excess of $2 million. Zurich’s policy limits were $1 million.

The following facts are relevant, to be able to understand the decision:

  • The case arose out of a car accident in which the driver and three passengers died. The families of the deceased passengers sued the estate of the driver;
  • On May 27, 1992, one group of plaintiffs offered to settle the quantum of damages at $1,657,032 (exclusive of interest and costs);
  • On April 6, 1993, the independent counsel for the driver’s estate agreed with the assessment on behalf of the estate;
  • On October 12, 1993, counsel for the parties met in chambers with Kennedy J., where minutes of settlement were entered into, with damages quantified as above;
  • On December 3, 1993, the parties attended again before Justice Kennedy, to make submissions about prejudgment interest and costs. On that occasion, it was argued that Zurich had breached its duty of good faith to its insured, by not having settled the plaintiffs’ claims promptly and by having failed to pay its policy limits into an interest-bearing account and making that interest available to the claimants;
  • On December 23, 1993, Zurich paid its limits into an interest-bearing account;
  • On March 29, 1994, Zurich paid out the limits in agreed-upon proportions;
  • On November 25, 1994, Justice Kennedy issued an endorsement dealing with interest and costs (almost a year following argument, it appears) and in his ruling, made some comments critical of Zurich’s failure to pay the policy limits into an interest-bearing account earlier than it did;
  • On December 21, 1994, Justice Kennedy’s endorsement was sent to the lawyer for Zurich, who immediately sent it to the lawyer for the insured’s estate; and
  • Consent judgments were taken out on August 21, 1995.

The insureds assigned to the plaintiffs their right to sue their insurer, Zurich, in exchange for a release of claims against the estate.

The plaintiffs sued Zurich on August 19, 1996, alleging breach of a duty of good faith owed to its insured (which had assigned to the plaintiffs its right to sue Zurich).

The motions judge, Mr. Justice Terrence Patterson, had held that the action was prescribed, based on the one-year limitation found in the statutory conditions of the standard auto policy (“in respect of the loss or damage to person or property [action] shall be commenced within one year next after the cause of the action arose”). His Honour held that the insured’s estate had known, at the latest, by December 21, 1994 (when its lawyers received Justice Kennedy’s endorsement, criticizing Zurich), that it had a possible claim against the insurer. On his analysis, the limitation period would have expired not later than December 21, 1995, making the action by the assignees out of time.

However, the Court of Appeal said, first of all, that the one-year limitation period did not apply. This was, it said, not a claim under the insurance contract at all. “On the contrary, this action contains a claim for breach of the independent duty of the utmost good faith, which an insurer owes to its insured. In Whiten v. Pilot Insurance Co., 2002 SCC 18 (CanLII), [2002] 1 S.C.R. 595, at para. 79, Binnie J. described the duty as ‘independent of and in addition to the breach of contractual duty to pay the loss’.”

For that reason, the applicable limitation period was held to be six years.

However, the Court of Appeal also allowed the appeal on the basis that the motions judge (sometimes referred to in the reasons as “the trial judge”) had interpreted the statutory conditions incorrectly. It held that the cause of action against Zurich did not arise until a point “when the liability of the Reid estate had been finally ascertained by judgment after trial or by settlement between the parties with the consent of the insurer”, which “[o]n the facts… did not occur until the issues of interest and costs had been resolved by the consent judgments that were taken out on August 21, 1995. It was at this time that the Reid estate had a liability to pay the third parties and it was at this time that it was entitled to demand indemnity from Zurich.”

Prima facie, this seems to be difficult to square with the Court of Appeal’s decision of a few days earlier, in Hamilton (City) v. Metcalfe & Mansfield Capital Corporation, dealing with the issue of when a claim is “discoverable”. There, the Court had held that a limitation period began to run as soon as the plaintiff knew that it had suffered some “damage”. It did not need to know its exact monetary loss for the cause of action to be complete.

However, the significance attached, in the Dundas case, to being able to quantify the claim before a cause of action would arise, stemmed from a requirement in statutory condition 6(2). It says, “[t]he insured shall not bring an action to recover the amount of a claim under this contract unless the requirements of statutory conditions 3 and 4 are complied with or until the amount of the loss has been ascertained as therein provided or by a judgment against the insured after trial of the issue or by agreement between the parties with the written consent of the insurer.” [Emphasis added] Until prejudgment interest and costs had been dealt with, the exact amount of the loss could not be ascertained.

So, in other words, if the one year limitation period in statutory condition 6(3) had applied, it would not have started to run until the amount of the loss had been ascertained, which occurred when the consent judgments were taken out, less than one year before the action against Zurich was commenced.

However, in fact, the one year limitation period did not apply, according to the Court. Rather, the six year limitation period in the former Limitations Act did. Obviously, on this analysis, statutory condition 6(2) would not have been relevant, so the cause of action would presumably not have arisen only when the precise amount of the claim was ascertained. However, the Court of Appeal did not comment on when the limitation period that it found to have applied would have started to run.


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