Section D Subrogation: Insurance Settlement Relevant in Damages Assessment Against Uninsured Driver in MacKean v. Royal and Sun Alliance Insurance
April 15, 2015
By Wendy Johnston, QC, at McInnes Cooper
On April 10, 2015 the NS Court of Appeal confirmed the law in NS when it decided in MacKean v. Royal and Sun Alliance Insurance, 2015 NSCA 33 that a court must review the reasonableness of any settlement a Section D insurer made with an injured party when considering the insurer’s claim for recovery of a settlement payment against an uninsured driver. The Court’s comment that an injured party’s recent medical condition could also be relevant to assessing the reasonableness of settlement means section D insurers should seek a damages assessment against the uninsured driver sooner rather than later.
The Settlement. In June 2009, Mr. Goodall, driving a vehicle he owned, rear-ended Ms. MacKean, injuring her and her son. Mr. Goodall had no insurance. Ms. MacKean and her son commenced action against Ms. MacKean’s insurer pursuant to the Section D of her policy seeking damages caused by an uninsured motorist. Mr. Goodall was joined as a defendant to that action. In December 2009, the insurer paid out $505,000 to settle their claims in exchange for a release and assignment of action.
The Assessment of Damages Motion. Mr. Goodall did not defend the action against him. Eventually, the insurer filed a motion for a default assessment of damages pursuant to NS Civil Procedure Rule 70.05; the Court heard it in January 2014 – four years after the settlement. The insurer presented affidavits from counsel and its claims examiner attaching the medical and employment information the insurer considered in arriving at the settlement in 2009. The motions judge decided that reasonableness of the settlement the insurer made was irrelevant to the quantum of its subrogated claim against Mr. Goodall. This decision ran contrary to older authorities, most notably the English Court of Appeal’s 1951 decision in Biggin and Co. Ltd. v. Permanite Ltd. The motions judge dismissed the motion for assessment of damages on the basis he did not have sufficient evidence to quantify damages. The insurer appealed the motions judge’s decision that the settlement was irrelevant to the assessment of its claim against Mr. Goodall.
The Appeal. The Court of Appeal unanimously agreed with the insurer, deciding the relevant factors support a test that considers the reasonableness of the settlement between the injured party and the insurer when that insurer attempts to recover its settlement from the uninsured driver:
- Unique Character. The unique character of Section D coverage required the motions judge to review the reasonableness of the settlement with the injured party. The insurer’s liability is limited to what an insured “… is legally entitled to recover …” from an uninsured driver, so an insurer has essentially the same interest as the uninsured driver in defending the claim made against it. This essentially places an insurer into a conflict of interest: although it has an obligation to pay its insured, it also has a common interest with the third-party wrongdoer in resisting or limiting payment.
- No Overpayment Concern. There is no realistic concern an insurer may overpay on a settlement under Section D. An insurer would have no incentive to overpay in light of the doubtful prospects of recovery of damages from the defaulting third-party, and coverage available under Section D is often exceeded in limits cases.
Evidence of Injured Party’s Recent Condition. The Court remitted the matter back to the Supreme Court for assessment – but suggested the insurer should also tender admissible evidence from the injured party, which would give the Court confidence the settlement was reasonable in light of the likely recovery. The Court also commented on the fact the insurer made its motion nearly four years after it made the settlement, noting this delay may require the insurer to provide evidence of the injured party’s recent condition, also of interest to the court in assessing the reasonableness of settlement. This should raise insurers’ concern: an injured party’s medical condition frequently improves after settlement of a court action. To avoid the possibility such a recovery may prejudice a Section D insurer’s recovery of a settlement, it is well advised to proceed with an assessment of damages against the uninsured driver as close in time to the settlement as possible.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Insurance Defence Team to discuss this topic or any other legal issue.
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