Where a person incurs a liability for injury or damage to the person or property of another, and is insured against such liability, and fails to satisfy a judgment awarding damages against the person in respect of the person’s liability, and an execution against the person in respect thereof is returned unsatisfied, the person entitled to the damages may recover by action against the insurer the amount of the judgment up to the face value of the policy, but subject to the same equities as the insurer would have if the judgment had been satisfied.
It essentially provides a third party a direct right of action against the insurer of an at fault party. While dealing with such a claim, the liability insurer would determine whether or not coverage could be afforded for the incident, as any insurer would determine in first place for any claim. Apparently, general exclusions appearing the policy would apply. So far so good!
In 2069586 Ont. Inc. v. Sovereign Gen. Ins. Co. et al, 2019, the Ontario Superior Court of Justice discussed the application of the S.132(1) of the Insurance Act, in conjunction with the Rule 21.01(1)(b) of the Rules of Civil Procedure that allows a party to bring in a motion to strike out a pleading on the ground that it discloses no reasonable cause of action or defence.
The facts of the case are as under:
The Plaintiff is a principal, officer, shareholder and director of both 2069588 Ontario Inc. (“206”) and 1138310 Ontario Inc. (“113”).
The Defendant Sovereign General Insurance Company (“Sovereign”), is, at all material times, the insurer of Aztec Financial Corp. (“Aztec”), providing coverage under the Mortgage Brokers Errors & Omissions Policy.
At all material times, Aztec was a mortgage broker for 206.
On July 8, 2016, an Agreement was entered into between, inter alia, Aztec, and 206. The Agreement dealt with 206 procuring a mortgage from Community Life Projects Inc. (“CLP”) and one of the conditions of the Agreement was that 106 provide Aztec with $459,975.00 payable to Aztec, in trust. The Agreement further provided that the funds would remain in trust, care and control of Aztec until July 27, 2017, at which time the funds would be returned to 206 without interest or deduction.
The money, however, was never repaid by Aztec.
THE UNDERLYING ACTION
An action was commenced by the plaintiffs for breach of contract, breach of trust, fraud, and conversion against, inter alia, Aztec and a judgment was granted in favor of the plaintiff. Pursuant to the Notice of Garnishment the Plaintiffs received a partial payment of $114,196.26, leaving $353,520.92 still owing.
ACTION AGAINST SOVEREIGN
The Plaintiffs brought this action against Sovereign General Insurance Company (“Sovereign”) to recover the outstanding sum of $353,520.92.
POSITION OF THE PARTIES
Sovereign should honor the unsatisfied judgment pursuant to S.132(1) of the Insurance Act, Sovereign being the E&O Insurer for Aztec at all material times.
There is no reasonable cause of action against Sovereign pursuant to S.132(1) of the Insurance Act. Further, the E&O policy provides no insurance coverage with respect to liability for the Judgment in the Underlying Action.
Should the motion be granted? Is there no reasonable case of action established by the plaintiffs?
S.132 (1) of the Insurance Act
The court, accepting the defendant’s arguments, confirmed that the injury in the present case was restricted to “pure economic loss” only, while the section provides only statutory basis for a direct right of action by an injured party against an insurance company which requires that there be “injury or damage to the person or property of another”.
The Insurance Policy
Sovereign argued that:
i) the liability does not come within the scope of the insuring agreement which is restricted to wrongful acts that arise solely out of or in connection with, the rendering or failure to render “professional services” as defined by the policy; and
The policy defined professional services as “only those services rendered by the insured while acting within the scope of the insured’s services as a mortgage broker and customary to the practice of mortgage brokering”.
Sovereign argued that the money held in trust was not secured by a mortgage. The trust arrangement, did not meet the definition of “mortgage” under the Mortgages Act.
The court rejected the argument. Woodley J., writing for the court, stated:
Under the Mortgages Act the services that fall under a mortgage broker include when he, she, or it engages in any of the following activities in Ontario, or holds themselves out as doing so: soliciting another person or entity to borrow or lend money on the security of real property; and negotiating or arranging a mortgage on behalf of another person or entity, or attempting to do so.
At the very least this Agreement appears to solicit, negotiate and/or arrange 206 to borrow money for “land acquisition and development”.
ii) Even if it arose solely out of the rendering of “professional services” such liability is excluded from coverage by the Policy exclusions;
The exclusions pertain to intentional and deliberate acts. Sovereign claimed that intention is proven by the very fact that the underlying action resulted in the judgment against Aztec.
Rejecting this argument, the court stated:
…it is not the prior underlying Statement of Claim that is deemed to be correct – it is the Statement of Claim that applies to the within action. There is no such statement in the Statement of Claim against Sovereign. The underlying Statement of Claim that was never tested cannot be utilized as proof of the contents on a Rule 21.01(1)(b) motion.
As for Exclusion K – the loss of money or securities in an Insured’s care or custody or control, or the actual or alleged inability to pay, collect or safeguard funds – there is insufficient evidence to establish that this exclusion would apply. In the circumstances it is not “plain and obvious” that some or all of the statement of claim discloses no cause of action.
The court rejected Sovereign’s arguments with respect to this rule. The court confirmed the test, that requires a moving party to prove that it is “plain and obvious” that the claim does not have any reasonable cause of action against the defendant and must show that it is beyond a reasonable doubt that the Plaintiffs could not succeed in its action.
Dismissing the motion, though acknowledging that Sovereign appears to have a very strong defence to the claim, Woodley J. stated:
On the basis of the evidence before me I cannot say that it is “plain and obvious” that the claim would fail for disclosing no reasonable cause of action.
Its interesting to note here that the court did not accept Sovereign’s argument based on the underlying action and even though the court acknowledged that Sovereign has a very strong defence, and probable the exclusions may apply, did not grant the motion. What confuses me is that why court would not accept Sovereign’s argument of application of the exclusion based on fraud, conversion etc. that has been essentially proven in the underlying action.