Canada: Finally A Solution! Proceeds Payable Under LawPro E&O Policy Are A "Debt" Subject To Garnishment By Judgement Creditors

Ever since the oft-criticized Perry decision,¹ LawPro has hidden behind s.132 of the Insurance Act to avoid paying judgment creditors. Judgment creditors could only access insurance proceeds available to the judgment debtor in those cases where their claim was for injury or damage to the person or property of another i.e. not for economic losses.

In a case that appears to be of first instance, judgment creditors were successful using garnishment to obtain indemnity under a LawPro errors and omissions policy that had insured their lawyers.² The court rejected the insurer's position that insurance proceeds payable were not a "debt" subject to garnishment and the plaintiffs recovered their economic losses effectively circumventing s.132.

Originally, the plaintiffs were successful plaintiffs in an oppression remedy action. Settlement of that action in April, 2013 included payment to their lawyer's trust account of cash and bank drafts totalling over $3.6 million. The lawyer, through his professional corporation (hereinafter "PC"), refused to release the settlement funds in accordance with the settlement, alleging concerns over the validity of the bank drafts.

This forced the plaintiffs to bring motions to obtain, over the following 8 months, what turned out to be several court orders, including a contempt order, to compel PC to release the funds. These orders were ultimately useless to the plaintiffs because the lawyer left the country, trust money in hand. The plaintiffs, left with court orders against the lawyer and PC turned to LawPro for indemnification.

LawPro is the insurance company that provides professional liability insurance to lawyers practicing in Ontario. The LawPro policy for 2013 contains the following coverage grant:

It is also mandatory for Ontario lawyers to carry "innocent party" coverage, the purpose of which is to protect members of the public against fraudulent acts of lawyers. In this case, PC had $1 million of coverage for fraud during the relevant policy period. The $1 million limit was inclusive of investigative and defence costs. In other words, the policy limit was diminished any costs and expenses incurred in respect of defence and/or investigation of the claim reduced the amount available under the policy.

The plaintiffs served LawPro with a notice of garnishment in excess of $3.6 million based on the court orders previously obtained. By way of LawPro's responding garnishee's statement, LawPro opposed the attempt to garnishee the policy on two grounds:

1. that the obligations under the policy were not a "debt" subject to garnishment under the Rules of Civil Procedure [specifically Rule 60.08] and
2. that LawPro had investigative and defence obligations to other individual lawyers associated with PC, the discharge of which may reduce are exhaust the policy limit in the future.

Rule 60.08 of the Rules of Civil Procedure provides that a creditor under an order for the payment or recovery of money may enforce it by garnishment of debts payable to the death or by other persons. LawPro argued that the LawPro policy obliged it to pay "on behalf of" the insured all sums which the insured became legally obligated to pay to a third-party as a result of a claim. In other words, as it had no obligation to pay anything to PC, there was no debt and, therefore, garnishment could not apply.

In support of this position, LawPro relied upon a decision of the Ontario Superior Court ("Austin")³ where the judge was dealing with possible garnishment of a fire loss policy. Under the fire policy, the insured had an election to repair or replace or to receive a cash value payment. The court reasoned that if the insured elected to receive the cash value, this could be a debt and subject to garnishment but that if the insured decided to repair or replace the damaged dwelling, the insurer would then pay the costs of such directly to a contractor. Based on a contextual interpretation of the terms of the policy, the court concluded that in this latter case, the garnishee would not be in violation of the notice of garnishment if the proceeds of insurance were paid to third-party contractors instead of being paid to the Sheriff. Ultimately, the Ontario court determined that the Austin decision did not support the position advocated by LawPro as the commentary relied upon by LawPro was obiter.

As there appeared to be no Canadian legal authority directly on point, the court turned to American decisions. Based on US case law, the court determined that the failure of a liability insurer to pay a judgment rendered against the insured upon a claim within the coverage of the policy constituted a breach of a condition of the contract and, by reason thereof, the insurer became indebted to the insured.

In the context of garnishment, US courts have held that when a liability policy is involved and the insured has become legally liable to a third-party for claim covered by the policy, a debt arises from the insurer to the insured. Consequently, if the insurer does not pay the third-party, the insured, as promise under the policy, has a cause of action against the insurer and that cause of action of the insured is an asset of the insured, which can be taken for his debt by garnishment. In one particular case, the court permitted garnishment even though the language in the indemnity policy did not require the insurer to indemnify the insured for sums that the insured pays to third persons; instead, the wording of the liability policy was virtually identical to the LawPro policy coverage grant "to pay on behalf of the insured all sums which the insured shall become legally obligated to pay".

Taking into account the important factor that the 2013 policy was mandatory insurance, the court reasoned that it "should not promote form over substance and thereby thwart public policy objectives behind mandatory insurance." The judge was clearly influenced by the fact that all lawyers in Ontario must have innocent party insurance precisely to protect the public against the type of fraud that was the subject of this garnishment. "Courts should avoid interpretations that could render mandatory insurance illusory and worthless". In the end result, the court concluded that the LawPro obligation to indemnify the lawyer and PC constituted a debt subject to garnishment under rule 60.08.

As to the second ground, LawPro attempted to characterize its obligations as competing duties to both indemnify and defend and that its duty to defend was a duty to provide a service which could not fall within the meaning of the term "debt" for the purposes of garnishment. It argued that the law did not permit the 2013 policy to be garnished in circumstances where the limits might be exhausted through the fulfillment of LawPro's obligation to defend possible claims against other lawyers in the future.

The court categorically rejected this position holding that there was a clear indemnity obligation which had crystallized and was due and payable. It reasoned that to accede to LawPro's position, would be to impose an unwarranted restriction on the plaintiff's direct rights, essentially constituting an unwarranted rewriting of the insureds' rights and LawPro's obligations under the policy. LawPro's potential defence obligations to possible future defendants did not take precedence over its indemnity obligations arising out of the court orders which the plaintiffs had obtained. The plaintiffs were successful garnishing the policy.

Footnotes

1. Perry v. General Security Insurance Co. of Canada 1984 CarswellOnt 671, [1984] I.L.R. 1-1800 47 O.R. (2d) 472, 4 O.A.C. 209, 7 C.C.L.I. 231

2. Abuzour v. Heydary 2014 CarswellOnt 15476, 2014 ONSC 6229

3. Austin Powder Ltd. v. Howard 2003 CarswellOnt 2964, [2003] O.J. No. 3090, 124 A.C.W.S. (3d) 693

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