Contract, Conflict and Subrogation

A claim in tort is properly commenced in accordance with the lex loci delicti commissi, Latin for “law of the place where the delict [tort] was committed.” But in automobile accident claims, the laws of an outside jurisdiction also may impact the value of a plaintiff’s claim.

For example, consideration must be given to section 113A of the Nova Scotia Insurance Act to determine whether a defendant has the right to deduct LTD payments made by an insurer to a plaintiff. Section 113A provides:

In an action for loss or damage from bodily injury or death arising directly or indirectly from the use or operation of an automobile, the damages to which a plaintiff is entitled for income loss and loss of earning capacity shall be reduced by all payments in respect of the incident that the plaintiff has received …for income loss or loss of earning capacity …under an income-continuation benefit plan if, under the law or the plan, the provider of the benefit retains no right of subrogation. [Emphasis added]

A similar provision exists in Newfoundland and Labrador’s Automobile Insurance Act, which states that a plaintiff’s damages “shall be reduced …if the provider of the benefit retains no right of subrogation.” As a result, a benefit provider’s subrogation right (e.g. LTD insurer) can be materially relevant to the assessment of damages in a tort claim.

The existence of any subrogation right is to be determined in accordance with the laws governing the contract of insurance, which jurisdiction may be different than the laws governing the tort claim. A contractual subrogation right may be limited by the laws under which the contract of insurance is to be interpreted.

Choice of Law

A contract of insurance will be interpreted in accordance with the choice of law chosen therein. The Supreme Court of Canada has confirmed parties to a contract are free to designate the law governing the contract, with no requirement of a connection to that jurisdiction (Syncrude Canada Ltd. v. Hunter Engineering, 1989 Carswell BC 37 SCC). Therefore, if a contract of insurance indicates it shall be interpreted in accordance with the laws of Alberta, for example, any court must interpret the contract within the context of that province.

If a contract does not specify the law of the contract, the decision of the Supreme Court of Canada in Imperial Life Assurance Co. of Canada v. Colmenares, 1967 CarswellOnt 65 (SCC) (“Colmenares”), provides guidance. This decision holds that the proper law for contracts of insurance is to be determined by considering the contract as a whole “in light of all the circumstances which surround it” and applying the law of the jurisdiction with the “closest and most substantial connection” to the contract.

In Colmenares, a Cuban national entered into a life insurance contract with a Toronto insurance company. When an issue arose as to the proper law of the contract, the Court concluded, despite the domicile of the insured being in Cuba, the proper law of the contract was Ontario because the circumstances surrounding the making of the contract all pointed to Ontario law.

Limitations on Subrogation Rights

Several provinces have enacted legislation to restrict subrogation rights regarding certain types of payments, including short and long term income replacement benefits. Regardless of any subrogation provision, courts consistently confirm a contract of insurance may be limited by the laws under which it is to be interpreted.

The Insurance Act in New Brunswick contains a restriction on subrogation in section 265.4, which was considered by the New Brunswick Court of Appeal in Graham v. Hill, 2003 NBCA 24 (“Graham”). In Graham, the respondent was involved in a motor vehicle collision and, as a result of her injuries, received LTD benefits under a group insurance plan issued by Sun Life, through her employer (the Federal Government). The Sun Life insurance policy contained a right of subrogation and, on Sun Life’s instructions, the respondent included Sun Life’s subrogated claim in her damages at trial.

On appeal, the Court was asked to determine whether section 265.4(1)(a) allowed the appellant to reduce the amount of the LTD payments received by the respondent from the damages award, and if section 265.4(3) barred the right of subrogation on the part of Sun Life. The Court of Appeal concluded that LTD disability benefits under the Sun Life policy were “payments for loss of income.” The Court further confirmed that section 265.4(3) operates to limit Sun Life’s ability to subrogate in respect of those payments.

Similarly, the Ontario Insurance Act contains a provision restricting subrogation rights. This was considered by the Ontario Court of Appeal decision in Kingsway General Insurance Co. v. Canada Life Assurance Co., 2001 CarswellOnt 2790 (C.A.). In Kingsway, a motor vehicle collision occurred in Florida. The injured party was insured by Canada Life Assurance Company, which then wanted to assert a subrogation claim against Kingsway, the insurer for the driver responsible for the accident. The Canada Life policy was issued in Ontario and contained two relevant clauses. First, the policy contained a contractual right of subrogation. Second, the policy contained a clause indicating that any terms in conflict with a statute of the province where the policy was issued would be amended to conform to the statute.

In this case, opinion from the Florida lawyer indicated Florida would apply the law of Ontario with respect to any contractual claims under the policy of insurance. As such, a question arose as to whether the Ontario law precluded a right of subrogation even though the contract itself allowed for the right. At trial, the Court determined the right of subrogation is a matter of contractual interpretation. Second, the Court found that there is “no basis” for a right of subrogation by reason of section 267.8(17) of the Insurance Act.

On appeal, two issues were raised. First, Canada Life agreed the law of the place where the accident occurred was applicable (i.e. Florida). Second, Canada Life maintained the trial judge should not have allowed Kingsway to benefit from the limits on contractual interpretation because Kingsway was not a party to the contract.

The Court of Appeal found the issue was one of contractual interpretation and such interpretation was to be made in accordance with the law of the contract (i.e. Ontario). On the second matter, the Court of Appeal found that although Kingsway was not a party to the contract of insurance, it was able to benefit from the limits on subrogation.

Conclusion

Kingsway confirms that if the law governing a contract is a jurisdiction different than the place where the tort occurred, the law of the contract will apply. That is, the law governing the tort claim is separate from the law governing the interpretation of the contract under which insurance is being paid. This is also true if an insurer is asserting a common law subrogation right because equitable subrogation derives from the contract of insurance (as a contract of indemnity) and therefore, “the determination of whether subrogation rights arise still depends on the interpretation of the contract itself” (Kerr v. Kerr, 2009 NSSC 27).

In third party automobile accident cases, it is important to remember that an LTD insurer’s subrogation right (if any) will be governed by the law of the contract and not the lex loci delicti. If the insurer’s subrogation rights are limited by the law governing the contract, any benefits paid by the insurer to the plaintiff may be deductible from the plaintiff’s claim for damages.

Tiffany Cheverie is a lawyer at Burchells LLP in Halifax, Nova Scotia, acting for insurers in personal injury, property, LTD and other insurance coverage claims. She is a member of Canadian Defence Lawyers (CDL) and Nova Scotia Insurance Women’s Association (NSIWA).