A recent Ontario case illustrates the complex nature of insurance law. It also demonstrates what can happen when a party to a coverage claim fails to have the proper advice on coverage issues. In this case, an automobile insurer denied a coverage claim because the broker listed the wrong vehicle on the application for insurance. The broker indemnified the insured, and then sought indemnity from the insurer. A judge then granted summary judgment in favour of the insurer, finding the broker had no claim in its own name, and notably it had not taken an assignment of the insured’s right to indemnity from the insurer. In January, the Ontario Court of Appeal (OCA) ordered the claim to proceed to trial. As explained below, the broker would be in a much stronger position if it had taken an assignment from the insured.
The Facts
Waqar Zaidi held a motor vehicle insurance policy brokered by Routh Chovaz Insurance Brokers Inc. (the “Policy”). In June 2013, the Policy was amended to insure a 2010 Mercedes Benz CL-350 (the “Vehicle”). The Policy was renewed in March 2014. However, Routh Chovaz failed to arrange for the Policy to insure the Vehicle. The Policy instead insured a 2008 Mercedes Benz CL-320.
The Policy was underwritten by
Aviva Insurance Company of Canada. Routh Chovaz had the authority to bind
Aviva. The relationship between Routh Chovaz and
Aviva was governed by a brokerage agreement (the “Agreement”). Section 10.3 of the Agreement stated that:
“[Routh Chovaz] shall indemnify and hold [Aviva] ... harmless from and against all [costs, expenses, claims, suits, demands or a]ctions ... arising as a direct result of the negligent acts or omissions of [Routh Chovaz] ... to the extent that [Aviva] ... has not caused or contributed to such liability by its own acts or omissions.”
In October 2014, the Vehicle was in an accident. Mr. Zaidi made a claim under the Policy. Aviva denied coverage, voided the Policy and refunded the premiums paid by the insured. Aviva argued that at the time of the accident, the Vehicle was not insured under the Policy. If it had known that Routh Chovaz intended to insure the Vehicle under the Policy, it would have charged an additional premium of $71.
Routh Chovaz’s errors and omissions insurer (the “E&O Insurer”) indemnified Mr. Zaidi. The E&O Insurer then brought a subrogated claim, asserting Routh Chovaz’s rights to indemnity (if any) against Aviva. However, the E&O Insurer did not take an assignment of claims the insured had against Aviva.
Aviva brought a motion for summary judgment of the E&O Insurer’s claim.
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The Motions Judge’s Decision
The motions judge dismissed the E&O Insurer’s claim.1 He first found that the E&O Insurer could not sue Aviva in contract. As part of its claim, the E&O Insurer relied on a case called Hunt v. Brandie. In Hunt, a broker bound an insurer to a policy of snowmobile insurance that had been improperly issued by the broker. Like Routh Chovaz, the broker had the authority to bind the insurer. The insured was later in an accident. The insured brought a coverage claim against the insurer. The court found that the insured’s claim was covered by the snowmobile insurance policy. The motions judge accepted the ruling in Hunt. However, he noted that the E&O Insurer had not taken an assignment of claims that the insured had against Aviva. As a result, the E&O Insurer could not sue Aviva in contract on behalf of the insured. The E&O Insurer could only sue Aviva in contract on behalf of Routh Chovaz. This was important because the claim in Hunt was brought by an insured. Hunt says nothing about claims brought by brokers against insurers. Thus, Hunt did not assist the E&O Insurer.
The motions judge then found that the E&O Insurer could not sue Aviva in contract on behalf of Routh Chovaz. Nor did the E&O Insurer have a claim in equity. In coming to this decision, the motions judge relied on the terms of the Agreement. The motions judge did not clarify why the Agreement precluded the E&O Insurer from bringing a claim in its own name against Aviva in contract or equity.
The OCA’s Decision
The OCA set aside the motions judge’s decision and ordered the claim to proceed to trial.2 The claim was sent to trial because the motions judge failed to explain why the Agreement barred the E&O Insurer from bringing a contractual or equitable claim against Aviva on behalf of Routh Chovaz. Until this issue was dealt with, the E&O Insurer’s claim could not be dismissed.
The Importance of Retaining Knowledgeable Counsel
This case demonstrates why parties to coverage claims should always obtain legal advice from those who understand insurance law. Every coverage claim must be thoroughly investigated. Although its claim is proceeding to trial, the E&O Insurer would have been in a much stronger position if it had taken an assignment from the insured by not taking this assignment, the E&O Insurer appears to have waived its right to sue Aviva on behalf of the insured. It will now likely be limited to suing Aviva in the name of Routh Chovaz. This is important because section 10.3 of the Agreement bars Routh Chovaz from recovering damages caused solely by its own negligence. The trial judge will likely find that the damages sustained by Routh Chovaz were caused solely by Routh Chovaz’s negligence. These damages were caused by Routh Chovaz’s failure to insure the Vehicle under the Policy, an error that arguably arose solely out of Routh Chovaz’s own negligence.
To avoid these issues, the E&O Insurer should have refused to indemnify the insured. In all likelihood, the insured would have then sought indemnity from Aviva. In these circumstances, Aviva would have had to indemnify the insured. Our courts have held that if an insurer binds itself to a policy, it cannot later deny coverage by relying on a broker improperly issuing the policy.
After indemnifying the insured, Aviva would have been able to assert a claim against the E&O Insurer. As noted above, Routh Chovaz arguably acted in a negligent manner when it failed to insure the Vehicle under the Policy. Section 10.3 of the Agreement permitted Aviva to recover any damages that it sustained as a result of Routh Chovaz’s negligence. However, the damages Aviva could recover in this claim would have been limited to the $71 additional premium it would have charged if Routh Chovaz had sought to insure the Vehicle under the Policy. This additional premium appears to have been the only damages Aviva sustained as a result of Routh Chovaz’s failure to properly insure the Vehicle.
Alternatively, the E&O Insurer could have indemnified the insured and taken an assignment of the insured’s coverage claim against Aviva. It could have then brought a claim against Aviva in the insured’s place. Again, Aviva would have had to cover the claim asserted on the insured’s behalf. However, section 10.3 of the Agreement would permit Aviva to claim damages it sustained as a result of Routh Chovaz’s negligence. This claim would have been brought against the E&O Insurer in its capacity as Routh Chovaz’s insurer. As noted above, the $71 additional premium would likely be characterized as damages that Aviva sustained as a result of Routh Chovaz’s negligence. Thus, in this scenario, any recovery obtained by the E&O Insurer would have to be offset by the $71 additional premium.
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