38 B.C.L.R. (2d) 69, 38 C.C.L.I. 1, [1989] I.L.R. 1-2474, [1989] 6 W.W.R. 82, 60 D.L.R. (4th) 372

Confederation Life Insurance Co. v. Causton

British Columbia Court of Appeal

Judges:  Seaton, Wallace and Locke JJ.A.

Heard:  February 8, 1989

Judgment:  June 20, 1989

Docket:  Vancouver No. CA009217

Counsel:  R. Brock, Q.C., for appellants.

M.J. Konig, for respondent.

Subject:  Insurance; Contracts

Insurance -- Contract of indemnity -- General.

Insurance -- Contract of indemnity -- Subrogation -- Right of insurer.

Insurance -- Insurance generally -- Subrogation -- Insured injured in motor vehicle accident and obtaining $104,930 judgment for wage loss -- Insured receiving only 75 per cent of award after deduction of lawyer's contingency fee -- Insured also receiving $18,464 in disability benefits, representing insurer's full liability under policies of indemnity for lost wages -- Court dismissing insurer's action for recovery of disability benefits -- Insurer's right of subrogation arising only where insured fully indemnified for loss -- Insured's loss comprising bona fide legal costs, including contingency fee, incurred to effect recovery from third party.

The defendant insured was injured in a motor vehicle accident. She sued the person responsible for damages, and recovered a judgment which included $104,930 for past and future wage loss, of which she received only 75 per cent after deduction of her lawyer's contingency fee. Under two policies of indemnity for lost wages issued by the plaintiff insurer, the defendant had also received $18,164.48, which represented the insurer's full liability under those policies. The insurer sought to recover these payments on the ground that it was subrogated to the insured's right of recovery against the wrongdoer to the extent of the payout to her. The action was dismissed at trial and the insurer appealed.

Held:

Appeal dismissed.

The justification for applying the principle of subrogation in favour of indemnity insurers is to prevent the insured receiving moneys in excess of his loss. From this it follows that the right of subrogation does not arise until the insured is fully compensated for the losses he has sustained. Unless an indemnity policy expressly provides that the insurer is entitled to share moneys received by the insured on a pro rata basis, these principles also apply where the coverage provided by the policy, although paid in full by the insurer, is less than the loss experienced by the insured. Moreover, for purposes of determining the extent of an insured's loss, it is appropriate to take into account bona fide legal costs incurred in effecting recovery from a third party. In the present case, taking into account both the contingency fee paid by the insured to her lawyer and the moneys paid to her by the plaintiff insurer, she received only 88 per cent of her wage loss. Since she was never fully indemnified for the loss which was the subject matter of the insurance, the insurer's right to subrogation never arose.

Annotation

This is quite a sound judgment. The reasons for judgment supplied by Wallace J.A. represent virtually a textbook review of the basic principles of subrogation and the authorities establishing those principles.

Indeed, the temptation at first is to be rather startled that legal counsel would entertain sufficient doubts about the soundness of the trial judgment, and the likelihood of the outcome of an appeal, to consider it advisable to pursue an appeal.

Creative as the argument may be that Sylvia Causton actually suffered two losses of which only one was relevant to Confederation Life, it would seem to have been doomed from the outset, and property so. Such an argument completely undermines the principle that, in calculating the insured's recovery for the purpose of determining whether the insured has been fully indemnified, it is appropriate to reckon that recovery net of all the proper costs of achieving the recovery.

To endorse the argument would be to unfairly prejudice the insured and to interfere very seriously in the process by which recovery is obtained from the third party. What is at issue here, chiefly, is the problem of carriage of the action against the third party. If we contemplate for a moment the fantasy that Confederation Life has assumed the prosecution of the claim against the person who injured Ms. Causton we can see quite quickly how the dynamics operate.

Suppose that Confederation Life achieved a tort judgment in the amount of $105,000 to recognize Ms. Causton's wage loss, and did so at a cost to itself of $26,000. How would it account to Ms. Causton? Could it pay itself back $18,000 and hand over $61,000 to her? Certainly not. Surely Ms. Causton should say "You have managed to establish that my loss was $105,000. You have already paid me $18,000. Please give me a further $87,000." It seems safe to guess that Confederation Life would be delighted to have its recovery costs recognized and to be permitted to turn over the sum of $79,000.

Of course Confederation Life would not expect to encounter recovery costs of $26,000. That is the nub of the argument made in this case for Confederation Life. The decision to appeal, and the argument made on appeal, surely were not entirely vexatious. Surely the real concern here must have been the notion that Sylvia Causton had made an improvident arrangement with her lawyer, or a general lack of sympathy for contingency fee arrangements. Although the judgment does not remark on these matters, it seems to be a natural supposition that Confederation Life's persistence in this case was motivated by a concern that the insured has carriage of the third party action and has some considerable liberty to pursue that action in ways which the insurer may think unwise.

Of course, insurers have long been unhappy with this arrangement and their unhappiness is reflected in those modifications to the subrogation scenario which we find as subs. (2) of s. 239, and as s. 336 of the Insurance Act, R.S.A. 1980, c. I-5, and as s. 129(2) and s. 242(2) of the Insurance Act, R.S.O. 1980, c. 218. These statutory modifications to the principle of full indemnity for the insured as a first principle, are indefensible except as a protection for a helpless insurance industry in the face of the ravages of improvident or untrustworthy insureds who run amok when entrusted with carriage of the third party action.

If an insurer feels aggrieved by the recovery achieved by its insured it has available the familiar arguments based on lack of due diligence or absence of good faith on the part of the insured. Those are the arguments it should make if the case calls for them.

James A. Rendall

Cases considered:

Castellain v. Preston (1883), 11 Q.B.D. 380 (C.A.) -- considered

Commercial Union Assur. Co. v. Lister (1874), L.R. 9 Ch. 483, 43 L.J. Ch. 601 -- considered

Darrell v. Tibbitts (1880), 5 Q.B.D. 560 (C.A.) -- considered

Driscoll v. Driscoll, [1918] 1 I.R. 152 (Ch. D.) -- considered

Gibson v. Sun Life Assur. Co. of Can., 45 O.R. (2d) 326, 6 D.L.R. (4th) 746, [1984] I.L.R. 1-1754 (H.C.) -- referred to

Globe & Rutgers Fire Ins. Co. v. Truedell, 60 O.L.R. 227, [1927] 2 D.L.R. 659 (C.A.) -- considered

Glynn v. Scottish Union & Nat. Ins. Co., [1963] 1 O.R. 599, [1963] I.L.R. 1- 103, 38 D.L.R. (2d) 210 (H.C.) [reversed [1963] 2 O.R. 705, [1963] I.L.R. 1- 111, 40 D.L.R. (2d) 929 (C.A.)] -- considered

Ledingham v. Ont. Hosp. Services Comm., [1975] 1 S.C.R. 332, 46 D.L.R. (3d) 699, (sub nom. Ledingham v. Min.) 2 N.R. 32of Tpt.) -- applied

Nat. Fire Ins. Co. v. McLaren (1886), 12 O.R. 682 (Ch. D.) -- applied

Page v. Scottish Ins. Corp.; Forster v. Page (1929), 98 L.J.K.B. 308 (C.A.) -- referred to

Willumsen v. Royal Ins. Co., [1975] 5 W.W.R. 703, [1976] 1 W.W.R. 446, [1976] I.L.R. 1-727, 63 D.L.R. (3d) 112 (Alta. C.A.) -- considered

Authorities considered:

Couch on Insurance, 2nd ed., vol. 16, p. 148.

25 Hals. (4th) 185, para. 333.

Appeal from decision of Mckenzie J., 27 B.C.L.R. (2d) 124, 32 C.C.L.I. 215, [1988] I.L.R. 1-2314, dismissing insurer's subrogation action.

Wallace J.A. (Seaton J.A. concurring):

Introduction

1 This appeal [from 27 B.C.L.R. (2d) 124, 32 C.C.L.I. 215, [1988] I.L.R. 1- 2314] raises the following issue: Is an insurer entitled to share, on a pro rata basis, the proceeds recovered by its insured from the wrongdoer where the insured has not recouped his full loss, although the insurer has paid the full amount due under its indemnity insurance policy?

Facts

2 The facts are set forth in detail in the reasons of my brother Locke which I have had the privilege of reviewing. It is sufficient for the purpose of these reasons to note that Sylvia Causton suffered injuries and lost wages in excess of $100,000 as a result of her involvement in an automobile accident. She was insured under two policies of indemnity for lost wages issued by Confederation Life Insurance Company. Confederation paid Ms. Causton a total of $18,164.48 which represented the insurer's full liability under the policies.

3 Ms. Causton successfully brought an action against the person responsible for the automobile accident and, after she had paid her lawyer's fees, Ms. Causton recovered approximately 75 per cent of her total wage loss. Even with the additional indemnity payments of $18,164.48 paid by Confederation, Ms. Causton still had recovered less than her total wage loss.

4 In brief, Ms. Causton did not recover her full wage loss, even though the insurer had paid all that it was required to pay under the policies.

5 Confederation sought recovery of the moneys paid under the policies to Ms. Causton by pursuing a claim for subrogation on a R. 18A application for summary judgment. The trial judge, McKenzie J., held that the insurance policies were indemnity policies (a conclusion with which I concur) and that, since the insured had not recovered her full loss, the right of subrogation did not arise.

Subrogation

6 The case raises the issue of when the right to subrogation arises. Does this right arise on recovery by the insured of a portion of the loss suffered, or only on recovery of the full loss sustained by the insured, thereby preventing double recovery?

7 Subrogation is defined as "the substitution of one person for another". The common law application of the principle of subrogation to the relationship between insurer and insured was set out in the leading case of Darrell v. Tibbitts (1880), 5 Q.B.D. 560 (C.A.). The question before the court was whether an insurer, who had paid money to the insured pursuant to an insurance policy, could recover the money back when the insured later received compensation from other sources for the damage he had sustained. Brett L.J. at p. 562 stated:

If the company cannot recover the money back, it follows that the landlord will have the whole extent of his loss as to the building made good by the tenants, and will also have the whole amount of that loss paid by the insurance company. If that is so, the whole doctrine of indemnity would be done away with: the landlord would be not merely indemnified, he would be paid twice over.

8 He went on to deal generally with the principles of subrogation at p. 563:

The doctrine is well established that where some thing is insured against loss either in a marine or a fire policy, after the assured has been paid by the insurers for the loss, the insurers are put into the place of the assured with regard to every right given to him by the law respecting the subject-matter insured, and with regard to every contract which touches the subject-matter insured, and which contract is affected by the loss or the safety of the subject-matter insured by reason of the peril insured against.

Cotton L.J. noted at p. 564:

... the money paid by the [insurance] company represents a sum in the hands of the landlord exceeding the loss sustained by him.

Thesiger L.J., at p. 567, stated:

But I am clearly of opinion as a matter of principle, that where the contract of insurance and the contract with the third party cover identically the same subject-matter, the assured has no right to more than an indemnity.

9 It is apparent from the reasoning of the court that the insured is entitled under the insurance policy only to indemnification for his loss and that once that was achieved, as a result of the payment of the insurance moneys, the insurer then was entitled in equity to be placed in the same position as was the insured -- with the same remedies and rights the insured had with respect to recouping the loss from third parties. The application of the doctrine of subrogation thus prevented the insured being paid twice for the same loss.

10 This principle was reiterated by the Court of Appeal in the leading case of Castellain v. Preston (1883), 11 Q.B.D. 380 (C.A.). Brett L.J. expressed the principle in these oft-quoted words at p. 386:

The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong. [emphasis added]

And at p. 387:

That doctrine [subrogation] does not arise upon any of the terms of the contract of insurance; it is only another proposition which has been adopted for the purpose of carrying out the fundamental rule which I have mentioned, and it is a doctrine in favour of the underwriters or insurers in order to prevent the assured from recovering more than a full indemnity; it has been adopted solely for that reason. [emphasis added]

And at p. 388:

In order to apply the doctrine of subrogation, it seems to me that the full and absolute meaning of the word must be used, that is to say, the insurer must be placed in the position of the assured. Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the underwriters and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished.

11 It is apparent that, if the justification for applying the principle of subrogation in favour of insurers was to avoid the insured receiving moneys in excess of his loss, and if, to attain this objective the insurer is entitled to be substituted for the insured so that it might exercise all the rights and remedies of the insured respecting the loss, then it follows that the right of subrogation should not arise until the insured had been fully compensated for the loss it had sustained. It would be patently unfair to deny the insured all his rights and remedies respecting the loss when he had not been fully indemnified for the loss. Conversely, if the insured has been indemnified for his full loss, it is only equitable that the insurer be put in the position of the insured insofar as recovering that loss is concerned.

12 This result is apparent from the words of Bowen L.J. at p. 402 of the Castellain case:

... that a person who wishes to recover for and is paid by the insurers as for a total loss, cannot take with both hands. If he has a means of diminishing the loss, the result of the use of those means belongs to the underwriters. If he does diminish the loss, he must account for the diminution to the underwriters. [emphasis added]

13 See also 25 Hals. (4th) 185, para. 333:

(3) It is only on payment of the whole of the loss sustained by the assured, whether total or partial, that the insurer is entitled to be subrogated to his rights of action, so that if the amount insured is less than the amount of that loss, the insurers, even though they have paid the amount insured, will not be subrogated to those rights.

14 What then is the principle to be applied when the coverage provided by the indemnity policy is less than the loss experienced by the insured? That question came before the courts in Commercial Union Assur. Co. v. Lister (1874), L.R. 9 Ch. 483, 43 L.J. Ch. 601. There the insured owned a warehouse which he had insured for approximately one-third of its value and which was burned down as a result of the negligence of the corporation of Halifax. The insurer admitted its liability to the insured on the policies, but claimed to be entitled to recover from the corporation of Halifax and sought to restrain the insured from suing the corporation for less than the whole amount of the loss or from compromising the action to the prejudice of the insurer. The insurer contended that when an insured had a remedy against a third party for his loss he became a trustee for the insurer for that proportion of the claim paid by the insurer pursuant to the doctrine of subrogation.

15 Jessel M.R. made the following observations at p. 602 in the course of refusing the insurer the right to interfere with the conduct of the action:

The plaintiffs say that the result will be that the defendant will be a trustee for them of the excess recovered from the corporation beyond the amount of his uninsured loss. That proposition I take to be indisputable. But the plaintiffs want to go further and say that the assured, who is entitled to bring the action against the corporation, is not entitled to be master of that action, and that though acting bona fide he is not entitled to compromise it or take any other step without their assent. I can find no ground whatever for that contention. He is entitled to bring an action to recover the whole loss to himself, including that against which he is indemnified. He is not entitled to compromise that action otherwise than bona fide.

His decision was approved on appeal.

16 This principle was analyzed and further defined in Canada in the reasons of Chancellor Boyd in Nat. Fire Ins. Co. v. McLaren (1886), 12 O.R. 682 (Ch. D.). In that case the insured McLaren had insured the lumber situate at his lumberyard against fire for $50,000. His property was set on fire by sparks from an engine of the Canadian National Railway, as a consequence of which McLaren suffered a loss of $115,000. He commenced an action against the railway and recovered $100,000 for his damages. The insurer contended that the insured McLaren was a trustee for it of the sum recovered in excess of the amount of the insurance. Boyd C. observed at p. 686:

Both parties agree that the equitable doctrine applies by which the insurers are entitled to be subrogated into the benefit of all compensation received by the assured from wrongdoers. But they differ as to the application of this doctrine to the circumstances of this case. The plaintiffs contend, in substance, that the right to subrogation arose when the companies made payment of the insurance to McLaren, and that he then became trustee for them pro tanto and in this character prosecuted his litigation against the railway company.

And at p. 687:

The primary consideration is to see that the insured gets full compensation for the property destroyed and the expenses incurred in making good his loss. The next thing is to see that he holds any surplus for the benefit of the insurance company.

And further at pp. 688-89:

It appears to me, therefore, more correct to say that the assured (in case of partial insurance) is not clothed with the full character of trustee quoad the insurance companies until he has recovered sufficient from the wrongdoers to fully satisfy all his loss as well as expenses incurred in such recovery. In other words, when the assured is put in as good a position by the recovery from the wrongdoer, as if the damage insured against had not happened, then for any any surplus of money or other advantage recovered over and above that, the insurer is entitled to be subrogated into the right to receive that money or advantage to the extent of the amount paid under the insurance policies. To adopt the language of Lord Blackburn in Burnand v. Rodocanachi Sons & Co., 7 App. Cas. at p. 339, it then becomes an equity that the person who has already paid so much of the indemnity for the loss is entitled to be recouped by having that sum back. See also per Brett, L.J., in Castellain v. Preston, 11 Q.B.D. at p. 391. Therefore, in this case before the plaintiffs can succeed it lies on them to shew that in equity and good conscience the defendant has received moneys which he ought not to retain, but should pay over to them as received to their use, and this cannot be done by a fiction or by holding that there is an estoppel on the defendant which precludes him from proving the truth as to his actual loss. [emphasis added].

17 To the same effect see Driscoll v. Driscoll, [1918] 1 I.R. 152 at 159 (Ch. D.), where O'Connor M.R. held that:

I now come to the claim of the Insurance Company. That is based on the right of subrogation, and the contention of the Company is that whatever sum is recovered by the insured must go to recoup the Company the amount paid on foot of the policy, irrespective of the consideration whether the insured has been fully indemnified against the loss sustained. This is met by the insured's contention that until he is fully indemnified he is not bound to contribute anything to the Company. I have no doubt that this latter view is correct. A contract of insurance against fire is only a contract of indemnity, and I think that the foundation of the doctrine is to be found in the principle that no man should be paid twice over in compensation for the same loss. The corollary to this is that a contract of indemnity against loss should not have the effect of preventing the insured from being paid once in full. I do not think that this can be disputed. The law seems to be well settled, and is recognized in the leading text-books, and is fully borne out by the cases cited by Mr. Meredith: Darrell v. Tibbitts [5 Q.B.D. 560] and Castellain v. Preston [11 Q.B.D. 380].

18 Returning to Canadian authorities, in 1927 the Ontario Court of Appeal in Globe & Rutgers Fire Ins. Co. v. Truedell, 60 O.L.R. 227, [1927] 2 D.L.R. 659, had occasion to consider whether an insurer had the right to share pro rata in the insured's settlement made, without the consent of the insurer, with a third party in the sum of $3,850 where the insurer had paid the amount due under a fire policy of $1,300, which sum represented only a portion of the insured's total loss of $12,000. The headnote at p. 659 succinctly reflects the decision of the court respecting the insurer's claim:

The doctrine of subrogation in insurance cases is founded on the insured's right to no more than a full indemnity. Therefore such doctrine does not apply where the insurer has not indemnified the insured in full, and in such case the insured may compromise an action against the person causing his loss without the consent of his insurer provided that such compromise is effected in good faith.

19 Hodgins J.A. stated at p. 662:

This right to recover back a partial payment by the insurer is a form of subrogation, and it depends upon the principle resorted to in all cases, which when applied requires that, as soon as the debt or claim against which the indemnity exists is satisfied, money recovered or received by way of indemnity against part of the loss or claim must be returned.

There is always a chance of bad faith or negligence in such a case as the one at bar. But, if the settlement of a claim, still doubtful in respect to the liability for it, or as to the amount which may reasonably be recovered, is made in good faith, so that less than the whole loss is recovered, there is no unfairness in holding that the insurer who agreed to indemnify to a limited amount should be compelled to carry out his contract. [emphasis added]

20 It should be noted that in Page v. Scottish Ins. Corp.; Forster v. Page (1929), 98 L.J.K.B. 308 at 312 (C.A.), Scrutton L.J. observed by way of obiter:

The discussion to-day has shown me that there are points which are not yet quite clear. For instance, it is suggested that the underwriter is not subrogated though he has paid the whole amount due on his policy if the assured has a further loss -- so that the assured has not got all he has lost though the underwriter has paid all he is bound to pay. It is not necessary to decide that.

21 He attributed the suggestion to a misappreciation of the ratio of the decision in Commercial Union Assur. Co. v. Lister, supra, and indicated he would like to reserve the question for further consideration.

22 For the reasons previously expressed herein, it is my respectful view that the principle, that the insurer is not subrogated to the insured's portion until the insured is fully indemnified for the loss sustained respecting the insured property, is founded on well recognized principles of equity.

23 In circumstances where the insurers have paid partial indemnity to the insured and the insured has recovered less than his full loss should the insurer demand that the insured share on a pro rata basis those moneys which have been recovered, any such obligation should be expressly provided in the policy of insurance. In the absence of any such provision it is appropriate that the insurer be held to its contractual obligation to indemnify the insured as provided in the policy.

24 The decision of Boyd C. in the Nat. Fire Ins. case was expressly approved by the Supreme Court of Canada in Ledingham v. Ont. Hosp. Services Comm., [1975] 1 S.C.R. 332 at 336-37, 46 D.L.R. (3d) 699, (sub nom. Ledingham v. Min. of Tpt.) 2 N.R. 32. The court was considering whether the commission may compete, proportionately and on an equal footing, with an injured person who made a claim against the motor vehicle accident claims fund and found that the limit of the fund were insufficient to enable him to recover in full his judgment for damages. Judson J., at p. 335, referred to the trial judgment:

The issue is clearly defined by s. 55(2) of Regulation 443. What meaning is to be assigned to "the right of subrogation" given to the Commission? Keith J. held that it had the ordinary meaning assigned to it by equity and that it followed that the Commission had no claim until the insured persons had recovered complete indemnity from the wrongdoer, and that where the wrongdoer had no insurance and where the claims of the injured persons from the fund exceed the limit of $35,000, there is less than an indemnity to them and no unjust enrichment or other equity capable of supporting a claim by the Commission to share pro rata with them. [emphasis added]

25 He concluded that the trial judge was right when he adopted the meaning of subrogation outlined by Chancellor Boyd in the Nat. Fire Ins. case that there was no obligation on the insured to share pro rata in the proceeds from the fund.

26 It is clear from the review of these authorities that, where the insurance policy only provides a partial indemnification for the loss experienced by the insured, the insured remains dominus litis, free to pursue such claims as he considers appropriate to recoup his loss and, acting bona fide, to compromise the claim if he considers it fit to do so. However, in order to prevent the insured from recovering moneys in excess of his loss, the insurer is subrogated to the rights of the insured to such surplus moneys, if any, recovered by the insured. Moreover, the insured is obliged to include in its claim against third parties a claim for that portion of the loss for which the insurer had indemnified the insured.

27 As policies have become more comprehensive and now provide indemnity for losses covering a wide range of different risks, i.e., fire, auto, business interruption losses, etc., concern has arisen as to the application of the principle defined in the Commercial Union, Nat. Fire, Ledingham cases and as well others.

28 In Willumsen v. Royal Ins. Co., [1975] 5 W.W.R. 703, [1976] 1 W.W.R. 446, [1976] I.L.R. 1-727, 63 D.L.R. (3d) 112 (Alta. C.A.), the insured owned a building insured for $20,000, the value of which was $40,000. The insured had agreed to sell the land and premises for $150,000, but before the sale could be completed the building was destroyed by fire. The insured compromised his cause of action to require the purchaser to complete the sale by accepting $140,000 as the total purchase price and then claimed against the insured for the full value of the fire policy -- $20,000. It is clear that if the insured had succeeded in requiring the insurer to pay the full amount of the policy, he would have profited from the fire in the amount of $10,000. Clearly, the insured was only entitled to claim $10,000 indemnity under the fire insurance policy, the insurer being entitled to take the benefit of the insured's sale agreement with the third party purchaser. McDermid J.A. concluded that a proper disposition of the appeal was to restrict the insured's claim to the amount of $10,000. Prowse J.A., with whom Lieberman J.A. concurred, took a different approach. He segregated the property which was the subject of the insurance policy, i.e., the building, from the lands involved and he accepted its value at $40,000. He recognized the insurer's obligation to pay the full fire coverage provided by the policy, i.e., $20,000. He then went a step further than McDermid J.A. and assumed the compromise of the claim against the third party was based on a pro rata reduction of the money due for the purchase of both land and premises so that instead of recovering the $110,000 for the land, the insured had received from the purchaser $102,667, and instead of receiving $40,000 for the building, the insured had received from the purchaser $37,333. Accordingly, the consideration for the building was only reduced by $2,667. He then concluded that payment by the insurers of $2,667 afforded the insured full indemnity for the loss by fire of the building since the insured had received the balance of the value of the building, $37,333, from the third party purchaser.

29 A question of concern in this rationale of pro rating the loss between the insured property and that which was not insured, is the assumption that the compromise of the claim against the third party purchaser could, in fact, be related to a pro rata reduction of the value of buildings and land. It probably had no relationship to either, but was simply an arrangement whereby the insured avoided litigation and obtained the needed cash. Apparently there was no evidence of the basis upon which the compromise was reached, and although it may well be that such an allocation, in the circumstances that prevailed, is justified by the application of equitable principles, I would wish to reserve any conclusion as to the applicability of such a formula to circumstances other than those that were present in the Willumsen case.

30 Prowse J.A. stated at p. 122 of the report:

The indemnity the insured is entitled to before the insurers' right of subrogation arises is indemnity for loss "against which the policy has been made" that is, loss to the insured property and not indemnity with respect to loss to other uninsured property.

31 The converse proposition is dealt with in the decision of Darrell v. Tibbitts, supra, by Thesiger L.J. at p. 567 that the insured must bring into account all benefits received from third parties from contracts which cover identically the same subject matter as that for which coverage is provided.

32 However, no authority has been provided us which would suggest the cost of recovering a loss from a third party was a different subject matter from the loss itself.

33 Appellant's counsel submits that in the instant case the insured sustained two losses; a wage loss, partially indemnified by the insurance payment of $18,164.48; and a loss related to legal costs for which the policy did not provide indemnification. He then submits that, since the insured received 100 per cent of the wage loss as a result of the court's judgment (if one disregards the legal costs), Ms. Causton was fully indemnified and the insurer is entitled to be repaid the $18,164.48 paid to her by Confederation under the policy, less 25 per cent of that sum, being the costs incurred in recovering the insurer's interest in the judgment.

34 I would reject this submission as I consider the reasoning leading to the conclusion to be contrary to the principles of subrogation. As previously noted, the basic objectives of subrogation are, first, to ensure that the insured receives full indemnification for the insured's loss and, secondly, to ensure that the insured does not retain a profit or surplus in excess of that indemnification.

35 It is recognized by the authorities that the cost incurred in effecting recovery from a third party -- be it legal fees or a bona fide compromise of a claim -- are properly taken into account in determining the amount of the recovery or indemnification that the insured achieves. See Nat. Fire Ins. Co. v. McLaren, supra, p. 688, where Boyd C. stated:

... the assured (in case of partial insurance) is not clothed with the full character of trustee quoad the insurance companies until he has recovered sufficient from the wrongdoers to fully satisfy all his loss as well as expenses incurred in such recovery. In other words, when the assured is put in as good a position by the recovery from the wrongdoer, as if the damage insured against had not happened, then for any surplus of money or other advantage recovered over and above that, the insurer is entitled to be subrogated into the right to receive that money or advantage to the extent of the amount paid under the insurance policies. [emphasis added]

36 Reference is made in Couch on Insurance, 2nd ed., vol. 16, at p. 148, footnote 19, refers to the following:

Where insurer paid portion of insured's collision loss and insured sued tortfeasor, insurer's right of subrogation did not require that partial recovery against the tortfeasor be pro rated in the proration the loss by insurer and insured bore to cash received; insured was entitled to first make good his own loss, including attorney's fees and costs of litigation. St. Paul Fire & Marine Ins. Co. v. W.P. Rose Supply Co. (1973) 19 NC App 302, 198 SE2d 482, Cert den 284 NC 254, 200 SE2d 655.

37 In the present case the insured never received the total wage loss -- she received 75 per cent of it. The money received by Ms. Causton pursuant to the judgment was subject to a charge against it for legal fees. She was in the same position as if she had compromised the claim. Her net recovery of her claim for wages, taking into account the moneys paid by the insurer, was 88 per cent of the loss she had experienced. Since she was never fully indemnified for the wage loss which was the subject matter of the insurance, the insurer's right to subrogation never arose.

38 In my opinion, this appeal should be dismissed.

Locke J.A.:

39 This appeal [from 27 B.C.L.R. (2d) 124, 32 C.C.L.I. 215, [1988] I.L.R. 1-2314] deals with the right of an insurer to recover from its insured by way of subrogation an amount said to be in excess of its liability under its agreements.

40 The insured, Mrs. Causton, was seriously injured in an automobile accident which rendered her permanently disabled and she was awarded a total of $104,930 for wage loss, made up of $58,060 for loss of earnings and benefits to trial, and $46,870 for the present value of the future loss of earnings and benefits to age 65. Her total award for all heads of damage was $196,603 together with interest and costs.

41 She was also insured under two policies written by the appellant: a long-term disability policy and a group weekly indemnity policy. Each policy gave the insured 60 per cent of her wages, subject to specified deductions. The insurer paid the insured $5,590 pursuant to the weekly indemnity policy and $12,574.48 pursuant to the long-term disability policy, for a total of $18,164.48.

42 There were no further payments made after 31st August 1986 by the insurer on the basis that the insured had been indemnified in the tort action in which she had been successful. But for the recovery in the tort action, further benefits would have been payable to the insured up to her 65th birthday on 25th September 1988, totalling another $14,336.

43 In the tort action, the insured's lawyer was retained on the basis of a 25 per cent contingency contract. The lawyer's total fees were $54,540 plus $15,746.55 for disbursements which, after deduction of recovered taxable costs and disbursements, left the insured's net payout to her lawyer at $51,473.93. As a percentage of the total award before addition to it of court order interest, the lawyer received 28 per cent and, as a percentage of the judgment plus court order interest, the lawyer received 24 per cent.

44 The insurer claimed the right of subrogation for the insurance proceeds paid by it and recovered by the insured in the tort action. It claimed a declaration that it was not required to pay any future benefits after 31st August 1986. The insured filed a counterclaim for future benefits payable under the long-term disability policy.

45 The trial judge found that the two policies were contracts of indemnity from which the right of subrogation arose. However, he dismissed the insurer's action on the basis that the insured had not obtained full indemnity for her wage loss -- past and future since due to the contingency fee contract, the insured received only about 75 per cent of the total tort award for her wage loss (75 per cent of $104,930 equals $78,700) which together with the insurance proceeds of $18,164 received from the insurer gave the insured a total recovery of only $97,164, that is, less than the total wage loss of $104,930 actually suffered.

46 In making this calculation, the learned trial judge assumed that all the legal costs associated with recovery of the wage loss in the tort action must be recovered by the insured before the insurer could recover under its right of subrogation.

47 There are two problems: first, are the policies contracts of indemnity; second, is the insured "indemnified" within the meaning of the authorities if she must bear some of the costs of recovery out of her own pocket (the lawyer's fees)? The trial judge so found, quoting in extenso from the leading case of Gibson v. Sun Life Assur. Co. of Can., 45 O.R. (2d) 326, 6 D.L.R. (4th) 746, [1984] I.L.R. 1-1754 (H.C.), where Henry J. conveniently summarized the principles. Each policy must, of course, be decided on its own terms.

48 The difference between a policy of indemnity -- which gives rise to an insurer's right of subrogation -- and [say] a policy of accident or sickness insurance -- which this is said to be by the insured -- was put by Spence J. as a trial judge in Glynn v. Scottish Union & Nat. Ins. Co., [1963] 1 O.R. 599 at 602, [1963] I.L.R. 1-103, 38 D.L.R. (2d) 210, where he quoted 22 Hals. (3d) 180-81:

Most contracts of insurance belong to the general category of contracts of indemnity, in the sense that the liability of the insurers is limited to the actual loss which is in fact proved." On p. 181 the author continues: "In the strict sense previously indicated, contracts of life insurance, personal accident and sickness insurance and some forms of contingency insurance are not contracts of indemnity.

49 As to the long-term benefit policy, I entertain no doubt that it is a contract of indemnity. It states that the monthly amount payable will be reduced by various amounts but, in particular, by "earnings or payments from any employers". It is a contract of indemnity.

50 The policy of weekly indemnity is more doubtful. The benefit is stated to be a "weekly indemnity benefit" but no other specific words assist. The point is, do the terms of this policy limit the amount payable or define the event insured against? A number of the specific terms appear to me to be ambiguous, equally applicable in either case. However, the requirements for reduction of benefits payable by any other benefits or income replacement indemnity, and the exclusion of any benefits at all in case the matter is covered by a workers' compensation claim or by a paid vacation, are indicative, in my mind, of indemnity and not of an agreed sum payable solely on the happening of an event. In the result, as did the trial judge, I conclude the weekly policy was a policy of indemnity and the insurer is entitled to exert a right of subrogation.

51 As to the second problem of subrogation I agree with Wallace J.A. whose judgment in draft form I have had the privilege of reading. The leading case of Nat. Fire Ins. Co. v. McLaren (1886), 12 O.R. 682, in my view correctly states the principle. In effect the position of the insurer is to deny the insured all the money required to put her in the same position as if the event had never occurred. The insured is dominus litis and provided that position is not abused the full costs of recovery of her insured interest, in my opinion, is to go to her before the right of subrogation arises.

52 I would dismiss the appeal.

Appeal dismissed.