In Ontario, all registered real estate salespeople and brokers are required to participate in the Real Estate Council of Ontario’s insurance program (see the Trust in Real Estate Services Act and regulations). This program includes “consumer deposit insurance,” which protects individuals who lose deposits due to real estate broker fraud, among other things. It is common for insurers that pay out amounts to third parties under insurance policies to look to recoup those payments through their right of subrogation. A recent case of the Superior Court of Justice considered the extent of this right in the context of a receivership and whether such an insurer was permitted to share in a pool of assets available to creditors.
Case Involved Fraud Involving Brokerage Trust Account
In Realtrium Holdings Pickering Inc. v. Simpson, the Court was asked to approve a proposed distribution of monies held by a receiver that had been appointed in relation to Wynn Realty Corporation, a real estate brokerage company. The personal defendants had perpetrated fraud through the brokerage’s trust account. The defendants were a husband, who had been responsible for maintaining and operating the trust account, and his wife. A property owned by the defendants was sold, with the sale proceeds being paid into court. After a receiver was appointed in relation to the brokerage, the proceeds were turned over to the receiver’s control. The receiver sought to distribute those proceeds to certain creditors/claimants – namely, those who had initiated the appointment of the receiver. However, the brokerage’s insurer also sought a portion of the proceeds, arguing that the distribution should also include “a pro rata distribution” to it “for subrogated and/or assignment claims” it had in respect of amounts it had paid out to victims of the fraud.
The insurer put forward two legal grounds for its claim to a portion of the proceeds. The first was that it had a right of subrogation under the insurance policy that had responded to the fraud claims. The second was that, after paying certain victims of the fraud, the insurer obtained contractual assignments of those victims’ claims. The Court considered both potential grounds.
Court Confirms Insurers Cannot Recover Against Their Own Insureds
The Court in Simpson considered whether to apply a common law principle that prohibits insurers from suing their own insureds to recover amounts paid under an insurance policy. This particular principle is grounded in the notion that insurers contract to assume risk from their insureds, and it would therefore “negate the purpose of insurance if the insurer could then sue an insured that was to be protected from risk by the policy” (see Mizen Holdings Corporation v. Toronto (City) et al.). However, the insurer in Simpson argued that this general principle was excluded by the particular wording of the insurance policy at issue. Alternatively, it argued that a general exception to the principle should apply in the context of fraud.
The Court closely examined the wording of the insurance policy in issue and, in particular, its definition of “Insureds.” It noted that the brokerage and the personal defendant constituted an “Insured.” It also referenced the wording in the policy that obligated the insurer “to pay on behalf of the Insured the amount of any Claim for Loss sustained by a Claimant …” The policy further stated that “Payment of any Claim shall only apply for the benefit of a Claimant.”
The insurer argued that victims of the fraud in issue were the only ones that should benefit from the coverage available under the policy, and in support of its argument, referenced the policy wording that said payment of a claim “shall only apply for the benefit of a Claimant.” The insurer argued that the definition of “Insured” should not include “a dishonest Registrant” such as the defendants. However, the Court disagreed. It observed that the wording of the policy expressly included the brokerage and personal defendants as “Insureds,” and the argument of the insurer ignored “the distinction between a beneficiary and an insured” under the policy. Further, the policy clearly covered “acts of theft, misappropriation or wrongful conversion combined, committed directly or indirectly by a Registrant …” Both the brokerage and defendants were registrants and, as such, the policy expressly included them.
The insurer also argued that the policy expressly excluded the application of the principle against suing an insured. To that end, it referenced the wording in the policy that stated the insurer was subrogated to “all rights of recovery against any person,” and submitted that this meant it could recover from an “Insured.” However, the Court said this wording, when considered in its proper context, addressed “the ability of the Insurer to pursue subrogated claims in the name of the Insured against third parties.” To do otherwise, said the Court, would require clear and unambiguous language. Further, the Court stated its conclusion in this regard was consistent with the principle that an insurer’s right of subrogation can put it in no better position than that of its insured, since a right of subrogation is really the right to pursue the cause of action the insured would otherwise have “against the party responsible for causing the loss.”
Lastly, the insurer argued that the Court should create a “fraud exception” to the principle against suing its own insured. In this regard, the Court referenced and followed the reasoning of the Alberta Court of Appeal in Condominium Corporation No. 9813678 v. Statesman Corporation. In that case, in considering whether to create such an exception, the Alberta Court of Appeal declined, commenting that “the most basic policy reason to bar subrogation against one of the insured is that the insurer has contracted to take onto itself the very risk, taking it from the very insured.” As that Court observed, either there is coverage, or there is not, and an exception to the rule against subrogation would get this “backwards.”
Fraud Claim Assignments Cannot Be Used to Sidestep the Subrogation Prohibition
Some of the fraud victims signed “Assignments of Interest” documents in which they assigned to the insurer their right to any claim they have “against any other person” in respect of their lost deposit. The insurer sought to rely on those documents to recover part of the receiver’s proceeds.
The receiver argued that the Court should not allow the insurer to use this method “to avoid the rule or prohibition against an insurer suing its insured through subrogation.” The Court ultimately agreed. It stated that the policy reasons underlying the prohibition apply equally to the use of the assignments. Further, it noted that allowing the insurer’s claim against the proceeds could “defeat the consumer protection objectives of this mandatory insurance framework.” This was because allowing the insurer’s claim could reduce the pool of funds otherwise available to fraud victims who had not been satisfied under the insurance policy.
For the above reasons, the Court ultimately refused to permit the insurer to participate in the proposed distribution of proceeds by the receiver, based on subrogated or assigned claims.
Milosevic & Associates: Providing Leading Civil Fraud Litigation Services in Toronto
If you are navigating disputes involving insurance coverage, fraud losses, or receivership distributions, experienced legal guidance is essential. The fraud litigation team at Milosevic & Associates provides strategic advice on complex subrogation issues, priority claims, and enforcement rights within insolvency proceedings. Contact us online or call (416) 916-1387 to discuss your matter and learn how we can help protect your financial and legal interests.