What stopped this $800,000 subrogated pollution claim

A subrogated claim could go off the rails if the client is bankrupt.

The Supreme Court of Canada announced Thursday it will not hear a subrogation case involving Desjardins, which applied last year for leave to appeal Douglas v. Stan Fergusson Fuels Ltd., released by the Court of Appeal for Ontario in March 2018.

The Douglas ruling effectively stopped State Farm (whose Canadian property and casualty assets were acquired in 2015 by Desjardins) from suing Stan Fergusson Fuels Ltd., Imperial Oil Limited and others on behalf of Art and Wendy Douglas. Subrogation law gives an insurer the right to sue others in the name of a client.

In early 2008, a 600-litre shipment of fuel oil to the Douglas home spilled, ultimately costing State Farm Canada, the home insurer, about $800,000. An endorsement on the Douglas’s home insurance policy with State Farm covered accidental escape of fuel oil.

In 2010, State Farm launched its subrogated claim against the fuel companies in the name of Art and Wendy Douglas, the named insureds on the policy. The allegations have not been proven in court. The lawsuit has effectively been stopped because in 2009, when State Farm paid out on the claim, Douglas’s property was controlled by a trustee in bankruptcy.

State Farm should have filed its subrogated lawsuit in the name of the trustee in bankruptcy, Justice Alexandra Hoy of the Court of Appeal for Ontario wrote last year. “Upon bankruptcy, it makes sense to read the subrogation clause in an insurance policy as if the trustee’s name appears in place of that of the bankrupt insured.”

That ruling was not on whether the defendants were at fault but rather on whether State Farm could sue those defendants in Douglas’s name.

That Court of Appeal for Ontario decision overturned a 2016 Divisional court ruling, which in turn had upheld a 2014 ruling by Justice Brian Abrams of the Ontario Superior Court of Justice.

Abrams reasoned that if State Farm could not proceed with the lawsuit in Douglas’s name, then the defendants would benefit from the fact that the plaintiffs were insured and “offend one of the underlying objectives of the doctrine of subrogation,” which is that the “loss should fall on the person who is legally responsible for causing it.”

Abrams’s ruling was on a request by the defendants to throw the lawsuit out of court, on the grounds that the Douglases had no legal capacity to sue because they were bankrupt.

The federal Bankruptcy and Insolvency Act stipulates that a person who is bankrupt “ceases to have any capacity to dispose of or otherwise deal with their property.” That right passes to the trustee in bankruptcy.

Douglas’s trustee in bankruptcy in 2009 disclaimed its interest in insurance claims from the oil spill, a three-judge panel of the Divisional Court noted in 2016. State Farm did not need the trustee in bankruptcy’s permission to proceed with the subrogated claim, the Divisional Court reasoned.

But Judge Hoy countered that although the trustee in bankruptcy disclaimed insurance claims by the clients State Farm, it did not disclaim tort claims made by the clients against the defendants.

The State Farm endorsement on the Douglas home insurance policy read: “You are insured for sudden accidental direct physical loss or damage to the dwelling and your personal property caused by the accidental escape of fuel oil from a fixed household type tank or apparatus and pipes which are part of a  heating unit for the insured dwelling.”