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Case Summary: Hartley v Security National Insurance Company
Defence + Indemnity

An Ontario plaintiff was held to be able to look to his OPCF 44R insurer to pay his damages in excess of a liability cap in the U.S. state where the accident occurred up to the OPCF 44R limits but not for the plaintiff’s U.S. legal fees.  

Hartley v Security National Insurance Company, 2017 ONCA 715, per Paciocco J.A. [4255]

Glen Hartley, and his wife, Theresa, were injured in a traffic accident while touring the state of Minnesota on their motorcycle. The accident occurred when the Hartleys’ motorcycle was struck by a state of Minnesota-owned truck, operated by a state employee. The Hartleys retained Minnesota counsel and sued the State of Minnesota for damages.
Under the Minnesota Tort Claims Act, Mr. Hartley could only receive a maximum of $500,000 (USD) despite his injuries warranting in excess of that. The settlement was also inclusive of legal fees (including a 22% contingency fee) and disbursements resulting in Mr. Hartley being left with only $386,500 CAD. There was also a $1,500,000 cap under subdivision 4(g) on the total that is payable “for any number of claims arising out of a single occurrence”.
Mr. Hartley approached his Canadian insurance company, Security National Insurance Company, to pay the difference, through his underinsured motorist coverage ceiling which provided for an endorsement to his motor vehicle insurance policy. He specifically relied upon the optional statutory “Family Protection Coverage Endorsement OPCF 44R” (“OPCF 44R”), pursuant to a policy issued to Mr. Hartley by Security National. OPCF 44R provides insurance against underinsurance.

The Canadian insurer refused to pay, stating that Minnesota was not an “inadequately insured motorist” within the meaning of OPCF 44R, and that, even if there was coverage, the policy would not include legal expenses incurred in the Minnesota action.
There were two key issues:

  1. Whether Minnesota was an “inadequately insured motorist” within the meaning of OPCF 44R; and 
  2. Whether Mr. Hartley could recover his legal expenses.

This was resolved before a motions judge under Rule 21.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Mr. Hartley won on both points. The motion judge held that Minnesota was “underinsured” or, in the words of OPCF 44R, an “inadequately insured motorist”. He also held that Mr. Hartley could claim the legal costs he paid (“U.S. fees”) as special damages against Security National.
Security National appealed that ruling, raising three arguments for refusing Mr. Hartley’s claim:

  1. That Minnesota was not underinsured, but self-insured, and therefore underinsured coverage does not apply.
  2. That the shortfall in recovery was not the result of underinsurance, but the result of a statutory immunity.
  3. That even if a self-insured state enjoying statutory immunity can be an “inadequately insured motorist”, it is not accurate to say that Minnesota is underinsured because Minnesota offers single occurrence coverage up to $1,500,000 US that exceeds the $1,000,000 CAD coverage ceiling payable under OPCF 44R. Security National claimed that its maximum liability is zero under the terms of OPCF 44R.

II. HELD: Appeal relating to legal fees allowed.

The Court rejected all three of Security National’s arguments.

1. Minnesota as “underinsured”/ an “inadequately insured motorist”

a. In sum, the Court held that the State was underinsured despite the fact it was self-insured and had partial immunity in respect of the amount it had to pay in damages.
b. As the policy was a standard form insurance contract, the Court applied a standard of review of correctness.

i. The material language of the OPCF clearly defined “inadequately insured motorist” and specifically the phrase “other financial guarantees as required by law in lieu of insurance” (included in the statute). The Court held that “’Financial guarantees as required by law in lieu of insurance’ would include a legislated obligation by an uninsured state to indemnify its employees by paying compensation for tortious damage caused by those employees.” [at para 30]. The fact that Minnesota chooses to self-insure was held not to be inconsistent with it being an “inadequately insured motorist”. 

2. Underinsurance v. statutory immunity

a. The Minnesota Tort Claims Act, which limited the damages that could be collected from Minnesota, did not remove its liability [at para 32]. The fact that Minnesota’s Tort Claims Act provides a partial statutory immunity, capping the amount of damages recoverable from the state, was held to be no answer to Mr. Hartley’s claim.  The insurer’s argument on this point had been rejected in Craig v. Allstate Insurance Co. of Canada (2002), 59 O.R. (3d) 590 (C.A.), leave to appeal refused, [2002] S.C.C.A. No. 309:

36  First, she held that the term "legally entitled to recover" describes the amount of damages that an at-fault underinsured motorist is proved to have caused, rather than the amount a tortfeasor can legally be required to pay. Accordingly, the legal entitlement to recover that triggers the obligation to indemnify is not compromised by limits on the ability to recover, whether those limits arise from statutory bars to action or statutory or contractual immunity provisions: Craig, at para. 20, relying upon Walker v. Allstate Insurance Co. of Canada (1986), 56 O.R. (2d) 11 (H.C.J.), affirmed (1989), 67 O.R. (2d) 733 (C.A.) (liability of tortfeasor's insurance company excluded because of policy breach -- recovery by claimant of damages under his own policy's uninsured motorist coverage); Johnson v. Wunderlich (1986), 57 O.R. (2d) 600 (C.A.) and Chambo v. Musseau (1993), 15 O.R. (3d) 305 (limitation period defences available to tortfeasor -- recovery by claimant of damages under his own policy's underinsured motorist coverage); Beausoleil v. Canadian General Insurance Co. (1992), 8 O.R. (3d) 754 (C.A.), leave to appeal refused, [1992] S.C.C.A. No. 367 (statutory limit on state liability in Massachusetts -- recovery by claimant of damages under his own policy's underinsured motorist coverage); Somersall v. Friedman (2000), 183 D.L.R. (4th) 396 (C.A.), affirmed, 2002 SCC 59, [2002] 3 S.C.R. 109 (settlement agreement compromising claim against tortfeasor voluntarily entered into -- recovery by claimant of shortfall under his own policy's underinsured motorist coverage).
37  Second, Cronk J.A. held that, properly characterized, the Florida statute did not make Florida immune from liability, nor did it bar a right of action, or prevent Florida from being sued and from having damages claimed and proved against it. What the statute did was limit the amount of compensable damages that Florida would be required to pay.

b. The Court also noted that the Minnesota statute in question had been interpreted the same way:

38  Not surprisingly, given its terms, this is how the Minnesota scheme has been interpreted in Minnesota. For example, in Ronning v. Citizen Sec. Mut. Ins. Co., 557 N.W (2d) 363 (Minn CA 1996), the Court of Appeal for Minnesota rejected the argument that a claimant was only "legally entitled to recover" an amount up to the statutory ceiling. The court held, at p. 366, that the statute:

[A]ffords limited immunity, as it does not prohibit a party from bringing an action and obtaining judgment against a tortfeasor as does absolute immunity. Thus, the immunity defence under [the statute is] not absolute within the meaning of the term "legally entitled to recover".

2. Limits argument

a. The Insurer’s argument that the $1.5million represented the “total of all Limits” available to Mr. Hartley was rejected, again relying on the Craig case:

45  A similar argument was attempted in Craig and was flatly rejected. In that case, the school board that employed the tortfeasor had an excess insurance policy with a US$700,000 limit. The policy was not available to the benefit of the injured plaintiffs, the Craigs. The Craigs' insurance company nonetheless argued that the excess insurance policy would produce a coverage ratio that would reduce the company's maximum liability to zero under an endorsement provision identical to s. 4 of OPCF 44R. With good reason, the motion judge took issue with the insurance company's attempt to avoid liability by relying on coverage not available to the Craigs. He commented that "[t]he logic of this defeats the purpose of the ... coverage, that is, to protect insureds from tortfeasors who have insurance which is inadequate to cover the plaintiff's damages" (emphasis in original): Craig v. Allstate Insurance Co. of Canada (2001), 26 C.C.L.I. (3d) 136 (Ont. S.C.J.), at para. 40.
46  Justice Cronk agreed with the motion judge's conclusion. On her reading of the endorsement at issue in Craig, the ordinary language of the provision was enough to defeat the insurance company's attempt to avoid liability.
47  The same holds true here. When the words "the total of all limits of motor vehicle liability insurance, or bonds, or cash deposits, or other financial guarantee as required by law in lieu of insurance, of the inadequately insured motorist" in s. 4 are given their ordinary meaning in context, it is clear that they refer to the funds available to the claimant bringing the claim.
48  Refuge from liability for the shortfall in coverage under Minnesota's Tort Claims Act cannot therefore be found in the insurer's maximum liability.

3. US legal fees as special damages

a. US fees were found not to be covered benefits under OPCF 44R:

55  I agree with the motion judge that the U.S. fees are not recoverable as an insurance benefit under OPCF 44R. On the clear terms of s. 3 of the endorsement, what is being provided by the insurer is indemnification for the shortfall in "compensatory damages in respect of bodily injury to or death of an insured person arising directly or indirectly from the use or operation of an automobile" (emphasis added). While the U.S. fees were clearly incurred in securing "compensatory damages", they are not themselves compensatory damages.

56  Moreover, the words of OPCF 44R setting out the quantification of the amount payable by Security National are clear in preventing recovery of the U.S. fees as a policy benefit. Section 13 provides:

13. In determining any amounts an eligible claimant is entitled to recover from an inadequately insured motorist, no amount shall be included with respect to costs.

57  Together, sections 6 and 7 of OPCF 44R underscore that insurance coverage does not extend to the payment of fees expended in securing compensatory damages:

6. The amount payable to an eligible claimant under the change form shall be calculated by determining the amount of damages the eligible claimant is legal entitled to recover from the inadequately insured motorist, and deducting from that amount the aggregate of the amounts referred to in Section 7 of this change form, but in no event shall the insurer be obliged to pay an amount in excess of the limit of the coverage as determined under Sections 4 and 5 of this change form.
7. The amount payable under this change form to an eligible claimant is excess to an amount received by the eligible claimant from any source, other than money payable on death under a policy of insurance, and is excess of the amounts that were available to an eligible claimant from

(a)   the insurers of the inadequately insured motorist, and from bonds, cash, deposits or other financial guarantees given on behalf of the inadequately insured motorist;

58  As can be seen, s. 6 allows the amounts referred to in s. 7 to be deducted from the amount payable to the claimant. I agree with para. 21 of Green: the language of s. 7 is unambiguous in directing that the insurer is "entitled to deduct all funds obtained ... as compensation. No allowance is made for any costs incurred in pursing recovery".
59  Indeed, s. 7 requires the deduction not only of amounts received by claimants, but also the "amounts that were available to the eligible claimant". In other words, what must be deducted is the higher of two amounts: the amount received, and the amount available. Even if it is accepted that Mr. Hartley only received US$500,000 minus the U.S. fees, he was entitled under Minnesota law to receive US$500,000 from Minnesota.
60  Simply put, the U.S fees are not covered benefits. The motion judge was therefore correct in finding that those fees cannot be claimed against Security National as "compensatory damages".

b. The Court also disagreed with the motions judge’s conclusion that the U.S. legal fees were recoverable as special damages, noting that “[t]o use the vehicle of special damages to provide compensation for costs incurred in securing compensatory damages undermines the contractual agreement of the parties.” [para. 61]