Insurer Still Dominus Litis Even After Insureds Made Assignments in Bankruptcy

03. October 2014 0

An insurer was declared the dominus litis of a subrogated claim brought in the name of the insured despite the insureds making assignments in bankruptcy prior to the insurer commencing the action.

Douglas v. Stan Ferguson Fuels Ltd., [2014] O.J. No. 3741, August 13, 2014, Ontario Superior Court of Justice, B.W. Abrams J.

Oil escaped onto the insureds’ property after being delivered by the defendant fuel oil company. The defendants were notified and responded to the fuel oil escape prior to the insurer being advised of the event. The insurer eventually paid for the initial remediation services and put the defendants on notice that it intended to pursue its subrogated interests with respect to the loss. The insurer indemnified the insureds in full and paid for repairs, remediation, additional living expenses, and related damages. Pursuant to the terms of the policy, the insurer was subrogated to all rights of recovery of the insureds against any third party.

About a year prior to the oil leak, one of the insureds filed an assignment in bankruptcy and was subsequently discharged. About 17 months after the oil leak, the other insured made an assignment in bankruptcy. He was undischarged at the time the action was commenced. The statement of claim was filed almost two years after the incident, naming the insureds as the plaintiffs.

The insurer applied for a declaration that it was dominus litus. The defendants brought a cross motion to strike out the claim on the basis that the insureds had no capacity to bring an action as both had become bankrupt prior to the claim. Accordingly, the causes of action vested in the plaintiffs’’ trustee in bankruptcy”.

The court found the right of subrogation was a contingent right that vested at the time the policy was entered into and the insurer became, at common law, the dominus litis at the time the insureds were fully indemnified. The court rejected the defendants’ argument that the bankruptcy scheme trumped the subrogation rights of an insurer because this would allow potential wrong-doers to profit from the fact that the plaintiffs were insured. The court re-emphasized the importance of substance over form. It also found that to give effect to the defendants’ position would offend the second objective of the doctrine of subrogation which is to ensure that the loss falls on the person who is legally responsible for causing it.

This case was originally summarized by Djuna M. Field of Harper Grey LLP.

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