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The law surrounding statutory third parties gives rise to many uncertainties in the field of automobile insurance litigation. The following article intends to provide a simple and practical guide to navigate the issues that commonly arise in the statutory third party context. This includes when an insurer is entitled to an order adding itself as a statutory third party and what rights and remedies are available to other parties affected by such an order.
The legislature decided many years ago that given the prevalence of automobiles in society and their potential to cause serious injury, it was necessary to guarantee the availability of compensation to those injured in automobile accidents. Automobile insurance was made mandatory with minimum liability limits set at $200,000. The legislature went further and guaranteed the availability of these minimum limits even if the insurer denied coverage to its insured based on a breach of the policy. To deal with this latter situation, the legislature created a mechanism that balanced the rights of both accident victims and insurers through the creation of the statutory third party.
In this regard statutory third parties are a unique creature of s. 258(14) of the Ontario Insurance Act. This section essentially permits an insurer to participate in the defence of a plaintiff’s action against its insured even though it has denied coverage to its insured. The purpose being to allow the insurer to take steps to protect its ongoing $200,000 exposure.
This was explained by Associate Justice Graham in his decision in Gordon v. Pendleton (2007), 87 O.R. (3d) 706, at paragraph 18:
…[Section 258] as a whole creates liability upon a motor vehicle liability insurer to a plaintiff who recovers a judgment against its insured… to the extent of Ontario’s minimum motor vehicle liability insurance limits of $200,000 notwithstanding any act or default of the insured [breach of policy]…Section 258(14) provides a mechanism for an insurer facing the exposure created by the balance of s. 258 to participate in and defend the action without forcing it to defend an insured to whom it is denying coverage and from whom it may ultimately attempt to recover money that it had to pay to a plaintiff notwithstanding the insured’s breach
Section 258(14) of the Insurance Act reads as follows:
Where an insurer denies liability under a contract evidenced by a motor vehicle liability policy, it shall, upon application to the court, be made a third party in any action to which the insured is a party and in which a claim is made against the insured by any party to the action in which it is or might be asserted that indemnity is provided by the contract, whether or not the insured enters an appearance or defence in the action. [emphasis added]
The two key takeaways in relation to the wording of this section are:
Common and straight forward breaches of the automobile policy that would permit an insurer to deny coverage include the following contraventions of Statutory Condition 4 (Authority to Drive):
Other common, but often less straightforward, breaches include the following:
As discussed above, once an insurer denies coverage to its insured for a breach of the policy, it can then make a motion to the court to have itself added as a statutory third party to reduce its exposure to $200,000 accordingly.
The reduction of the available insurance limits to $200,000 may impact other parties to the litigation including:
Given the number of other parties who may be impacted by an insurer adding itself as a statutory third party, the issue arises as to who is permitted to question the insurer’s denial of coverage and what is the appropriate method to do so.
It is important to distinguish between questioning or challenging an insurer’s denial of coverage and opposing the statutory third party motion.
In this regard, the law is clear that the court must grant an order adding an insurer as a statutory third party so long as the insurer provides evidence that it has denied coverage to its insured. Once this has been established, there does not appear to be any basis for which any party can oppose the insurer’s motion. (See Gordon v. Pendleton and Deonanan v. Kwan)
Equally important, the insurer does not need to provide particulars or reasons for its denial of coverage at the motion stage. The statutory third party order is mandatory provided the court is satisfied that the insurer has denied coverage. This is set out clearly at paragraph 16 of Gordon v. Pendleton, wherein Associate Justice Graham states the following:
The wording of the section places no obligation upon the insurer to provide reasons for the denial, and the use of the word “shall” as emphasized in the previous paragraph requires the insurer be made a third party based solely on the denial of coverage. The language is unambiguously mandatory and does not confer any discretion upon the court. Accordingly, an insurer on a motion under s. 258(14) of the Insurance Act is not obliged to disclose the reason for its denial of coverage. [emphasis added]
Once an insurer has been added as a statutory third party, it has all the same rights and obligations as other parties to the litigation. This includes production of documents and oral discovery (see Prentzas v. Rivera 2015 ONSC 5867 para 38). Accordingly, the statutory third party can be served with a Notice of Examination just like any other party. The real question is whether it can be compelled to answer questions and produce documents relating to its denial of coverage position.
An insured can question and, indeed, challenge its own insurer’s denial of coverage. Historically, the courts preferred that this be done in a separate “coverage” proceeding. (See Gordon v. Pendleton and Deonanan v. Kwan, Roach v. Policandriotis, 2008 CarswellOnt 411 and Ahmed v. Maharaj, 2010 ONSC 5281).
However, it is also permissible for the insured to submit a defence and then add their own insurer as an ordinary procedural third party under Rule 29.01, in order to seek indemnity for the plaintiff’s claims (see paragraph 26 of Lica v. Dhaliwal 2015 ONSC 3888).
Traditionally, the only recourse for a plaintiff or other party who wanted to question or challenge the insurer’s off coverage position was to obtain a judgment against the at fault insured and then commence an application against that party’s insurer under s. 258(1) of the Insurance Act in a subsequent proceeding (See Ahmed v. Maharaj 2010 ONSC 5281). The plaintiff or OPCF44R insurer had no direct right to question or challenge the statutory third party in the primary action because the denial of coverage was a contract dispute between the at fault insured and its insurer only. There was simply no privity of contract between the plaintiff or the OPCF44R insurer and the statutory third party insurer.
However, the 2011 decision of the Ontario Court of Appeal in Maccaroni v. Kelly 2011 ONCA 411 followed in Lica v. Dhaliwal 2015 ONSC 3888 and Prentzas v. Rivera 2015 ONSC 5867 has dramatically altered this long established view.
It is important to note that these cases involve lawsuits where the plaintiff has claimed against its own OPCF44R insurer in response to the at fault driver’s insurer adding itself as a statutory third party. These cases do not appear to apply to lawsuits in which the plaintiff has not sued its own OPCF44R insurer (see Antony v. Bakthaavachalu 2017 ONSC 4943). This is an important distinction that will be discussed in more detail below.
In this regard, once the plaintiff makes a claim against its own OPCF44R insurer it must still prove its entitlement under the OPCF44R Endorsement. One of the ways a plaintiff can do so is by establishing that the available insurance limits of the at fault defendant have been “reduced by operation of law” pursuant to s. 1.8 of the OPCF44R Endorsement which specifically contemplates the statutory third party situation.
The question before the court in Maccaroni was whether by simply denying coverage and adding itself as a statutory third party, had the insurer reduced its insurance limits “by operation of law” or is more required of the statutory third party to justify its denial of coverage.
The Court of Appeal held that more is required of the statutory third party to justify its denial of coverage and that plaintiff had the right to obtain full particulars of the denial of coverage and policy breach from the statutory third party. This was necessary for the plaintiff to establish its entitlement to coverage under its OPCF44R claim by demonstrating that the available limits of insurance have indeed been properly reduced.
The Court of Appeal stated the following in this regard:
19. The issue here is really whether the [statutory third party’s] limits are ‘reduced by operation of law” merely on its say so…In other words, is it enough to allege breach of policy conditions to reduce the liability limits of coverage available to pay third party claimants and then settle by paying the reduced limits? I think not. The words “by operation of law” must have some meaning beyond a liability insurer merely taking an off-coverage position…
20. By alleging policy violation and adding itself as a statutory third party, the insurer who takes an off-coverage position, as Co-operators did here, merely preserves its position. It will then be an issue to be determined in the subsequent litigation…Until there is a finding, however, the insurer’s allegation of policy violation is merely that, an unproven allegation, and the policy limit will remain that set out in the insured’s policy.
The decision in Lica v. Dhaliwal, followed the Court of Appeal decision in Maccaroni and specifically commented on what information and documentation the statutory third party had to provide to the plaintiff and OPCF44R insurer in relation to its denial of coverage and the circumstances of the alleged breach of policy.
The court held that both the plaintiff and the OPCF 44R insurer had the right to question the statutory third party on discovery and to receive documentary production relating to its denial of coverage. Only then, could the plaintiff and the OPCF44R insurer determine if the reduction in limits to the statutory minimum of $200,000 was legally justified, a determination necessary for the plaintiff to access its OPCF44R coverage according to the decision in Maccaroni.
It is, however, important to note that the actual coverage issue between the statutory third party and its insured is not being determined in this process. Rather, the statutory third party was simply required to disclose certain information so that the plaintiff and the OPCF44R insurer could properly consider their own issue of whether the OPCF44R coverage is indeed available to the plaintiff in the circumstances. In other words, the plaintiff and OPCF44R insurer are not legally “challenging” the denial of coverage but rather only seeking information as to the reasons and circumstances of the denial of coverage. The court in Lica made the following comments in this regard:
43 The Court of Appeal in Maccaroni rejected the argument that the merits of the insurer’s denial of coverage can only be determined in an action between the statutory third party and the tortfeasor. The Court held that a factual determination in respect of the coverage issue binds neither the statutory third party nor the tortfeasors and affects only whether the plaintiff is entitled to coverage from its own insurer under the OPCF 44R endorsement. [emphasis added]
44 Mr. Lica is not challenging State Farm’s denial of coverage. He acknowledges that State Farm may have been justified in denying coverage. However, he requires evidence as to their reasons, so that it, and a court, can determine whether coverage was denied “by operation of law” for the purposes of Mr. Lica’s claim for OPCF 44R coverage.
A similar finding was made in the decision in Prentzas v. Rivera 2015 ONSC 5867. Again, the issue before the court was whether a statutory third party had to answer questions and provide documents pertaining to its decision to deny coverage. The court in this case stated the following:
37 I find in this case, both the Plaintiff and the [OPCF44R insurer] require the productions sought, to determine whether the tortfeasor’s insurer CAA’s off-coverage position is supported.
…
44 [The OPCF44R insurer] has been sued on the basis that the CAA policy is “reduced by operation of law”. Documents relevant to that issue are producible.
In Lica, the statutory third party raised an important issue that disclosure of details regarding the insured’s conduct leading to the breach of policy could potentially result in prejudice to the insured who was still a defendant in the lawsuit. For example, if the grounds for the breach and subsequent denial involved impaired driving.
In response to this concern, the court in Lica still ordered the statutory third party to provide the information sought by the plaintiff and the OPCF44R insurer but if the statutory third party believed that such disclosure would prejudice the defence of the defendant or raise an issue of privilege, it could seal its answers and provide them to the court for review for a determination pursuant to Rule 31.06(6) on whether this information should be withheld.
A similar procedure was established in the very recent case of Jones v. Manzon 2024 ONSC 1205. It that case the court undertook a document by document review in order to deal with the statutory third party’s concerns that disclosure of certain of its documents could result in prejudice or loss of litigation privilege.
In this case, Associate Justice Graham once again analyzed the law pertaining to statutory third parties and more specifically, whether statutory third parties were required to provide the plaintiff with the reasons and particulars for its denial of coverage. In this case, the plaintiff, who was seeking such information, relied upon the decisions in Lica v. Dhaliwal and Prentzasv. Rivera arguing that these cases had expanded the disclosure requirements of statutory third parties.
Associate Justice Graham refused the plaintiff’s request in this regard on the basis that the plaintiff in the case before him had not brought a claim against its own OPCF44R insurer. The requirement for greater production from the statutory third party in Lica and Prentzas was based on the requirement for the plaintiffs in those cases to establish entitlement under their OPCF44R Endorsements.
In the absence of this requirement, the plaintiff was only entitled to know the reason for the denial of coverage but not the details of the investigation that led to that decision (see paragraph 6).
The decision in Antony v. Bakthaavachalu was cited with approval in the recent decision in Jones v. Manzon. In that decision the court stated the following with respect to the two different requirements for production depending on the involvement of an OPCF44R claim:
23 The scope of discovery of a defendant’s insurer, where the plaintiff is pursuing damages for injuries and losses sustained in a motor vehicle accident, differs where the defendant insurer is not simply a statutory third-party but rather the plaintiff has additionally pursued its case against the plaintiff’s underinsured motorist [OPCF44R] insurer in the same action as a party defendant.
24 The differing scope of discovery, available to the plaintiff, of the defendant’s auto insurer was thoroughly and carefully considered by Associate Justice Graham in his decision in Antony v. Bakthavachalu 2017 ONSC 4943. In this decision, the court confirmed that the plaintiff may properly seek disclosure of the details of the insurer’s investigation of an accident as well as the circumstances of the insured’s coverage where the plaintiff’s underinsured motorist insurer is a party defendant to the action. If the plaintiff’s underinsured motorist insurer is not a defendant to the proceeding, the plaintiff’s discovery rights would be limited to those provided for in rule 31.06(4) of the Rules of Civil Procedure and the jurisprudence related to that rule.
Accordingly, a plaintiff’s right to obtain details of the statutory third party’s denial of coverage only exists when the plaintiff has made a claim against its OPCF44R Endorsement. In the absence of such a claim, a plaintiff is only entitled to know the reason for the denial but not the details of the investigation underlying the denial.
The issues reviewed in this paper can be reduced to the following 7 points:
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