How Accident Victims share Insurance Proceeds to cover Awarded Damages

In order for an injured person to be eligible for damages arising from a motor vehicle accident, the defendant (typically the ‘at fault’ driver) must be deemed negligent in causing the accident and the plaintiff’s injury.  In many negligence lawsuits, the defendant driver was convicted of a traffic violation or criminal driving action in connection with the accident and they don’t contest fault when a claim is brought against them.

In a small percentage of cases, the opposing parties may not be able to reach an agreement and the personal injury action must be decided in arbitration or trial.  This most commonly results when the defendant in the action denies liability for the accident, or when the plaintiff and defendant cannot agree on fair compensation.  In more complicated cases, further judgements may be needed beyond a determination of liability and damages.

Regardless how the case is decided – whether through negotiation, mediation, arbitration or trial - if a personal injury lawsuit is successful against a vehicle owner and/or driver, then the defendant’s insurance company is generally obligated to pay the awarded damages up to the maximum amount of coverage on the policy.  Sometimes, there are multiple defendants who share responsibility in causing an accident, as well as multiple insurance companies who have a stake in the outcome of the case.  

A recent personal injury action, House v. Baird, was complicated by the fact that it involves several plaintiffs, multiple defendants and two insurance companies, and some of plaintiffs agreed on a settlement while one did not.  And, after liability and damages were resolved, one of the plaintiffs filed an action asking the Court to determine how insurance proceeds from the two policies should be shared. This issue was resolved in a 2019 trial. 

House v. Baird (2019) is the last of several personal injury actions connected with a single car accident, that commenced after a young man lost control of a car and crashed into an oncoming vehicle on a rural road in Wilmot Township southwest of Kitchener. The accident occurred during the winter and in inclement weather, and it involved four 17-year-old boys who were long-standing friends.  The civil actions also involved two insurance companies.  Donald Baird was the car’s owner and a passenger at the time of the crash, and was insured by State Farm Insurance Canada. Tyler House was the driver and was insured by Nordique Insurance.

The outcome of the collision was very tragic and resulted in the death of one passenger, Adam Samms, a Kitchener high school student, as well as serious injuries to Baird and a catastrophic head injury to the driver, House.

The car owner (Baird) and the Samms family brought civil actions against both drivers involved in the accident as well as the Township of Wilmot.  The Samms family settled their lawsuit for $200,000 and Baird settled his lawsuit for $500,000. Also, the plaintiffs agreed that they would be bound by liability findings in a future civil action brought by House and, if there was a shortfall in available insurance coverage, the amount of the settlements would be pro-rated with the plaintiffs in the other actions.   

Determining Negligence for the Accident

In an earlier (2015) trial,  House and the Samms family sued Baird, the driver of the oncoming car (Murray) and the Township of Wilmot for damages.  In order to determine negligence in the accident, the judge assessed several circumstances that were alleged to have contributed to the crash, including slippery road conditions, driver distraction and defective tires on the car.  

The Township of Wilmot was found to have an adequate system for winter maintenance and was therefore held not liable for the accident. As a result, both House’s lawsuit and Baird’s cross-claim were dismissed against the Township.  The judge approved the settlement made by House against the driver of the oncoming car and ordered Murray to pay $675,000 in damages to the catastrophically injured House.

The judge also ruled that the car owner (Baird) and driver (House) were each 50 percent liable for the accident.  A report by Waterloo Region Police found that the car’s tires were worn far beyond an acceptable level and were over-inflated and mismatched. On these grounds, the judge ruled that Baird was contributorily liable since the condition of the tires on his car created a risk of loss of control, particularly during snowy or slippery road conditions.  The driver, House, was determined liable because he was driving too fast given the current road conditions; he was likely smoking marijuana while driving; and there was reason to believe he was distracted.

Distributing insurance funds to cover the awarded damages

Prior to the 2015 judgement, Baird made an offer to settle with all three parties (House, Baird and the Samms family) for his policy limit of $1 Million, which was to be distributed as determined by the Court or as agreed upon by the plaintiffs.  However, House did not accept the offer and decided to take the lawsuit to trial; and, after a 50% reduction for contributory negligence and the settlement for the deceased accident victim, House obtained over $1.4 million in damages against Baird. 

Baird and House each had vehicle insurance policies with third-party liability limits of $1 Million.  Baird’s car was insured with State Farm for a $1 Million third-party liability limit and House had a similar vehicle insurance policy with Nordique Insurance.  Because House’s liability arose during the use of Baird’s car, State Farm is the first loss insurer and the Nordique policy is excess insurance after the State Farm coverage has been allocated.

In the most recent action (in 2019), House motioned the Court to seek direction on the application of insurance law with respect to legal priorities and entitlement regarding the distribution of insurance funds. In his motion, House requested that his claim be granted a higher priority than the Baird and Samms claims, and he also asked for a declaration that he had the right to garnish insurance funds from the Baird settlement.

The judge stated that, regardless of the number of eligible claimants injured, House’s insurance coverage under Nordique cannot be relied upon to pay the unsatisfied portion of House’s judgement against Baird because the $1 Million liability limit on the Nordique policy doesn’t exceed the amount under Baird’s policy with State Farm (also $1 Million).  Under the Insurance Act, s. 277, Nordique is under no legal obligation to pay any shortfall in damages to House.

Marshalling is an approach to gain equity between two or more creditors who are owned debts by the same debtor, where one of creditors can enforce their claim against multiple funds while the other creditor can only claim against one fund.  In the current case, House argued that the State Farm policy proceeds should be marshalled so that he receives the entire $1 Million policy limit, and Baird and Samms would consequently be able to access the policy proceeds on his Nordique policy.  House believes that this solution is most equitable and supports the remedy of marshalling.

However, the insurers argued, instead, that the State Farm policy should pay the three claims on a pro rata basis. Accordingly, the $1 Million in coverage would be shared by House, Baird and the Samms family.  In this scenario, Baird and the Samms family can recover their entire shortfall in damages from the Nordique policy.  However, because House is not entitled to third-party liability coverage from his own policy with Nordique, he will experience a $668,000 shortfall in compensation for damages which, House argued, is an incorrect distribution of funds.

On the question of marshalling, Justice Braid found that marshalling in the current context is in conflict with the Insurance Act, related laws and caselaw; therefore, equitable remedies should not be applied in this case.  And, although the facts of this case are compelling, marshalling to obtain equity is not an option and available insurance funds must be paid to the claimants on a pro rata basis.

In making her decision, Justice Braid referenced Insurance Corp. of British Columbia v. Kushneriuk (2004), where the B.C. Court of Appeal held that “the existence of additional insurance available to satisfy the claims of some of the plaintiffs is an irrelevant consideration”.  The B.C. Appeal Court reversed an earlier decision in which a judge decided that the most seriously injured of three accident victims is eligible to 100% of available first loss insurance coverage, rather than sharing the proceeds with the other two claimants on a pro rata basis.  The Court concluded that the most seriously injured claimant is only entitled to their pro rata share of insurance proceeds.

House also argued that the Baird settlement is unenforceable because it was not approved by the court and court approval is required under the Rules of Civil Procedure, Rule 7.08.  However, Justice Braid disagreed and ruled that the Baird settlement is enforceable because the settlement includes similar language (including references to the pro rata distribution) as the Samms settlement, which was approved. Also, the Baird settlement was reached five years in the past and only after settlement meetings involving House’s defence counsel. Finally, the judge pointed out that House had not taken previous steps to set aside the Baird settlement.

House had issued Notices of Garnishment to both State Farm and Nordique and asked for a declaration that none of Baird’s insurance proceeds are exempt from garnishment.  Baird disagreed and argued that the settlement funds should be subject to garnishment. On this question, the judge found that House may garnish the Baird settlement to recover the shortfall in his insurance proceeds; however, Justice Braid asserted that a judge has the discretion to decide what portion of a settlement, if any, should be redistributed.

Under the Rules of Civil Procedure, a court may determine rights with respect to garnishment, which requires assessing the distribution of settlement funds to decide which portion can be garnished.  With respect to the Baird settlement of $500,000, the amount is all-inclusive and the settlement terms did not specify how that amount was arrived at.  Mr. Baird’s lawyer acknowledged that the amount was based on the severity of Baird’s injuries, future care costs, and potential future loss of income and competitive advantage.  However, because the settlement did not state how damages were apportioned, Baird’s claim for statutory accident benefits, including income replacement benefits and rehabilitation expenses, could be maximized.

The judge noted that, at the time of his settlement, loss of income represented a substantial portion of Baird’s total losses, and although she did not know the exact amounts allotted to each of Baird’s losses, Justice Braid believed that it would be appropriate to allocate 50% of his damages towards loss of income. The other 50% would be allotted to general damages for pain and suffering, future care costs, and his claim under the Family Law Act.  With respect to the latter damages, the judge asserted that this share of the settlement should be excluded from garnishment since pain and suffering damages are not subject to garnishment (per Mullin v. R-M & E Pharmacy (2005)) and further, all damages of a personal nature (including pain and suffering, future care, and housekeeping damages) are normally not subject to garnishment by creditors.

On the question of whether, and how much of, Baird’s loss of income settlement should be garnished, the judge acknowledged that the serious injuries Baird suffered in the accident may reduce his ability to earn a future income.  The judge decided that 60% of the lost income portion of his settlement should be spared from garnishment.  Therefore, the amount left for House to garnish is 20% from Baird’s settlement payable by State Farm and Nordique. This percentage entails 40% of half the total settlement, since the other half of Baird’s settlement is exempt.

The accident that gave rise to the House v. Baird trial was clearly a life-changing event for the friends who were injured, as well as for their families.  And, although Baird and Nordique were more successful than House, in terms of the economic outcome decided in the 2019 action, the case does not represent an ideal financial resolution for any of the accident victims.  Justice Braid acknowledged that there is no doubt that House and Braid sustained severe injuries and their situation is compelling; nevertheless, her decision is bound by insurance law, statutory provisions and the contractual agreement previously reached by some of the plaintiffs and the result is an award of damages that is not equitable for House.  However, it should be noted that, if the Township of Wilmot had been found even partially liable for the accident, there would be no issue of policy limits.

An injury claim that is resolved through one or more trials, such as House v. Baird, will typically incur significantly higher legal costs and take more time than those that are won through negotiation.  However, fair and successful resolution of any injury case involving a negligent driving action requires that your legal counsel is well experienced in negotiating with insurance companies and able to arrive at the optimal settlement for you, given the unique circumstances of your case.

At Dietrich Law, our team understands the emotional stress and physical challenges faced by accident victims, and our vast experience settling car accident lawsuits facilitates getting the best possible outcome for your case.  If you were hurt in an automobile accident, talk to an experienced Kitchener Waterloo car accident lawyer at Dietrich Law today to find out how we can help.