An insurer may not be responsible for costs when an insured is unsuccessfully defended pursuant to an insurance policy

A Plaintiff was successful in a professional negligence claim against a lawyer.  The lawyer was insolvent.  The Plaintiff attempted to obtain costs from the insurer who funded the defendant’s litigation.  The Plaintiff was unsuccessful at supreme court, and on appeal.

Perez v. Galambos (c.o.b. Galambos & Co.)., [2008] B.C.J. No. 1845, British Columbia Court of Appeal, M.A. Rowles and R.E. Levine JJ.A., October 1, 2008

The Appellant, Perez, worked as an office manager at Galambos & Company.  During her time there, she advanced approximately $200,000.00 of her personal funds, without security, to Galambos & Company Law Practice.

In 2004, Mr. Galambos assigned himself into bankruptcy and his law corporation went into receivership.  While he acknowledged the $200,000.00 debt, Perez, was unable to recover  because available funds were used to satisfy secured creditors.

In October, 2004, the automatic Stay of Proceedings against Galambos under the Bankruptcy and Insolvency Act was lifted by Leave of the Court to allow Perez to bring an action against Galambos, other than an action in debt.

In December, 2004, Perez commenced an action against Galambos alleging negligence, breach of contract, and breach of fiduciary duty.  Her action was dismissed at trial, but reversed on Appeal and a  judgment for $200,000.00 was granted.  An application for Leave to Appeal the decision to the Supreme Court of Canada has been filed and the application is pending.

Both the action and the Appeal were defended by Mr. Galambos’ insurer, The Lawyer’s Insurance Fund (“LIF”).  LIF was not a party to the proceedings.

In March, 2008, Perez commenced an action against LIF directly claiming the $200,000.00, as well as costs of the action and the Appeal.  This action has yet to be heard.

While there is no dispute that Perez is entitled to an Order for Costs against Galambos, the issue is whether Perez can recover directly against the non-party insurer who defended the action.

Perez’s argument was that LIF was the real litigant, as only its interests were at stake.  LIF argued that it was contractually obligated to defend Galambos and was therefore not intermeddling.  LIF further argued that Galambos had an interest in the determination of whether he breached his professional duties.  LIF further submitted that an order for costs against it would be inappropriate as it could pre-judge the merits of the second action.

An award of costs against a non-party is unusual and exceptional, and should only be made under special circumstances.  Special circumstances have been held to include situations where a non-party has engaged in fraudulent conduct or an abusive process or gross misconduct in the commencement or conduct of a litigation, or when the non-party is the real litigant.

A non-party who is funding litigation can be liable for costs as the real litigant in one of two ways: 1) the non-parties put up the insolvent party as a “man of straw” litigant to pursue their own interests while insulating themselves from costs, and 2) have promoted the litigation properly, so as to be guilty of the Tort of Maintenance.  Maintenance is described as wanton and officious intermeddling or any lack of justification or excuse.

A non-party insurer who defends litigation in order to minimize its only liability is not necessarily the motivating force in pursuing the proceedings, nor is it improperly promoting the litigation to advance its own interests.  A non-party will not usually be held liable for costs when they have neither initiated nor promoted the proceedings, but merely assumed responsibility for defending an action.

In this case there is no suggestion LIF engaged in fraudulent conduct, abusive process, or gross misconduct in the litigation.  LIF was defending a claim made against Galambos and his Law Corporation, and there was no suggestion LIF was using Galambos as a “man of straw”.

LIF was not guilty of maintenance, and was therefore not the real litigant. Mr. Galambos’ professional reputation was at issue.  An insurer’s interest in minimizing its financial liability is not incompatible with the interest of defending against professional misconduct.  LIF had valid reasons for becoming involved in litigation and was not found to have promoted the litigation.

In the result, the application was dismissed.  Leave has been granted to the Supreme Court of Canada.

This case was originally summarized by Neil J. MacDonald and originally edited by David W. Pilley.

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