Third Parties

• Author: Denis Boivin
• Pages: 320-336

320

1London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299

[London Drugs]; Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999]

S.C.R. 108 [Fraser River].

A. INTRODUCTION

There are two parties to any insurance contract: the insurer and the

person named in the contract as the insured. In contract theory, only

parties to a contract are bound by its obligations, and parties to a con-

tract are the only ones who may reap its benefits. This elementary prin-

ciple is known as privity of contract. However, as noted by the Supreme

Court of Canada on two separate occasions in the 1990s,1this princi-

ple is subject to various exceptions and accommodations. In this chap-

ter, we will review some important nuances of privity of contract as

they relate to Canadian insurance law.

In some circumstances, a third party may purchase rights directly

from the named insured and essentially buy into the rule of privity. In

other circumstances, a third party may enjoy the benefits of an insur-

ance policy without ever joining the contractual relationship. In the

first scenario, the stranger to the contract is called an assignee, where-

as in the second scenario, he or she is called a third-party beneficiary.

The first two sections of this chapter deal with assignments — those

that occur voluntarily (section B) and those that occur by operation of

the law (section C). The last two sections deal with the rights and

THIRD PARTIES

chapter 13

duties of third-party beneficiaries — third parties named in the con-

tract (section D), and judgment creditors — those with a legal claim

against the insured (section E).

B. Voluntary Assignments

A voluntary assignment is a transfer of ownership in property or inter-

ests that operates with the knowledge and consent of the owner. In

insurance law, voluntary assignments may arise in three distinct set-

tings. First, they may occur when the insured assigns the object covered

by the insurance policy to a third party — for example, when the

insureds sell their house. Second, they may occur when the insured

assigns the policy itself to a third party (this is called novation). Third,

and most commonly, they may occur when the insured or a third-party

beneficiary assigns his or her right to receive benefits under the policy.

In the following paragraphs, we will review the legal consequences

associated with each form of assignment. This outline will be followed

by a discussion of two recurring examples of voluntary assignments

involving the right to receive insurance: an assignment in favour of a

mortgagee and an assignment in favour of a purchaser.

1) Assignment of the Object

Whether it is a sale or a gift, an assignment of the insured object has

straightforward implications for both the assignor and the assignee.

Simply put, an absolute assignment of the insured object puts an end

to the insurance contract. The insured no longer has an insurable inter-

est and thus cannot make a claim in the event of a loss. As noted in

Chapter 4, the relevant time for determining the existence of an insur-

able interest is the time of loss, not the time of signing the contract.2

The assignee is not in a better position than the assignor and so cannot

make a claim in the event of a loss — whether or not he or she has pro-

vided consideration for the transfer. As noted in Rayner v. Preston, an

insurance contract is a personal contract between the insurer and the

insured.3As such, the contract does not follow the object in the event

of a transfer.

Third Parties 321

2 The rule is the reverse for insurance contracts that are not based on the princi-

ple of indemnity, including life insurance contracts. Obviously, this form of

assignment is not relevant for such contracts.

3 (1881), 18 Ch.D. 1 (C.A.). This case is reviewed in Chapter 11.